Cotton market groping for direction; China holds the key
November 13,
2019
While global cotton prices have begun to show signs of
recovering from multi-year lows seen late August, in recent weeks the rates
have improved by close to a fifth to reach about 66 cents a pound. This is the
highest level seen in last four months. Earlier, during the third quarter of
the year, speculative investors had built short positions on the bourses where
they are now seen reducing.
Trigger for the welcome price rise has emanated from the
definite signs of easing in the ongoing trade tensions between the US and
China. After protracted negotiations between the two warring sides, there are
signs of some kind of reconciliation, even if partial. This is seen giving a
bit of a boost to all commodities in general.
US price fall
While the US is the world’s largest exporter of cotton, the
Asian major is the largest importer. The standoff between the two has disrupted
the global value chain and impacted prices. China’s imposition of tariffs on
the US-origin cotton has pressured down cotton prices within the US. Other
markets are experiencing the fallout, given that markets are substantially
integrated.
Thankfully, things are changing for the better. As the
world’s largest consumer, China builds stocks from time to time. In recent
years, it has been destocking, and now there is greater conviction in the
market that the destocking cycle has ended and restocking will begin. China is
reported to have purchased some cotton recently.
The supply-demand fundamentals for 2019-20 too are
supportive. According to International Cotton Advisory Committee (ICAC),
consumption at 26.2 million tonnes trails the production estimate of 26.7 mt.
Of course, the market cannot ignore the fact of burdensome inventory. The year
will end with stocks of 18.7 mt, as projected by ICAC.
In other words, a combination of plentiful supplies, modest
demand growth and large inventory will not let the market run amok. At the same
time, as and when the trade conflict shows more concrete signs of easing, there
will be a pickup in export trade which in turn will boost prices.
Once the market begins to move upwards, speculative capital
is sure to move in and exert an exaggerated impact. How soon this will happen
is of course the multi-billion dollar question.
Market participants are also closely watching developments
in India, especially on the production and quality side. Varying estimates are
doing the rounds of the market, ranging from a low of 330 lakh bales (170 kg)
to a high of 390 lakh bales. While there is consensus that this year’s crop is
surely better than last year’s (2018-19), damage due to unseasonal rains in
October cannot be overlooked. More clarity on crop size and quality may emerge
by the end of the month as second picking is under way.
So, the domestic market is still beset with unclear crop
size and quality on the one hand, and uncertain demand conditions, especially
export, on the other. With the recent price appreciation in dollar terms and a
weakening trend in the rupee, some Indian exporters are reported to have
concluded a few export deals with China, apart from regular buyers such as
Bangladesh.
On the bourses, notwithstanding recent reductions, short
position holders are still large, betting on softer prices. This opens up
opportunity for price recovery if a trade deal between USA and China is inked.
Because stocks within China stand reduced, purchases by the country will boost
prices, but the escalation may be limited by stocks held outside of China.
Source:https://www.thehindubusinessline.com/