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Cotlook Indices

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Cotlook 'A' Index 87.75 (-0.50) 14:33 GMT 14th Dec, 2018
  

August 2018 Market Summary

International cotton prices moved lower during most of August, to end the month appreciably below the values that had been ruling in recent weeks. The 2018/19 Cotlook A Index (shipment no earlier than October) began the season just below the dollar mark but had relinquished almost seven cents by the end of the month. The movement of prices was influenced predominantly by lower settlements in New York futures that mid-month saw the December 2018 contract to fall to its lowest level since May.

The sharp downturn was prompted by a surprisingly bearish domestic crop estimate from USDA. In its first forecast of the season based on objective yield surveys, the Department raised its assessment of domestic production by 735,000 bales (480 lbs) to 19,235,000.  The increase came as a surprise to many observers, whose focus had been on the negative impact of the chronic drought in West Texas on the region’s dryland production.  USDA’s assessment of abandonment in the state of Texas is indeed historically high at nearly 42 percent, but much of those losses had already been reflected in the July estimate (reduced by one million bales). Higher than anticipated yield expectations from the West Texas irrigated crop, and indeed from most other parts of the cotton belt, account for the largely unexpected upward adjustment.  National average yield is forecast to set a new record.

The sharp fall of futures did elicit a more active mill demand than had been in evidence earlier in the month, both for US and other growths hedged on the No. 2 contract. In addition to the flurry of mill buying, concentrated mainly on cotton available for nearby delivery, the downturn in New York prompted a significant bout of fixation activity.  The volume of unfixed on-call sales on the December contract fell during the week ended August 17 by over 18 percent to 41,051 contracts (equivalent to 4.1 million bales or roughly 930,000 tonnes).  The proactive mill fixations (three months ahead of First Notice Day) suggested that spinners have a degree of confidence in the prevailing price structure. Overall, unfixed on-call sales remain historically high, which is also considered a probable source of support to the market over the coming months.

Supply and demand in China remained under close scrutiny during August. Crop reports reflected growing optimism in the outlook for yields in Xinjiang.  Surveys suggested that the local supply position prior to movement of the domestic new crop is comfortable.  ‘Commercial’ stocks (excluding those held by spinners or in the State Reserve) at the start of the month were estimated at almost two million tonnes and ‘industrial’ (mill) stocks at just below 800,000 tonnes. A further 346,780 tonnes of government-owned cotton were disposed of at daily auctions during August, representing just over 50 percent of the supplies offered (a slightly lower proportion than during July).  By the conclusion of the auction series at the end of September, State Reserve stocks are therefore likely to have fallen below three million tonnes. It remains to be seen whether, as some observers have suggested, that figure represents a threshold below which the authorities would be reluctant to see Reserve stocks remain.

While potential import buying on behalf of the State Reserve remained a bullish but still hypothetical prospect, a meeting of the National Development and Reform Commission paved the way for an upturn in mill purchasing. Allocation to eligible spinners of the additional 800,000 tonnes of import quota (originally announced in June) is to take place in September, while shipments against the quota will be permitted until February 2019, rather than the end of the calendar year, as was previously believed.  Since local supplies are ample, as noted above, and forecasts of domestic output show an upward bias, the evolving relationship between local and international values (illustrated in the accompanying chart) will determine spinners’ enthusiasm for using the quota.

In the absence of any signs of progress toward a resolution of the Sino-US ‘trade war’ (various additional tariffs were introduced on Chinese products by the US, to which China immediately responded in kind) the participation of US cotton in any upturn in import buying is uncertain at best.  Of the four weekly reports released during August, Vietnam was the most significant destination in three. Surprisingly, perhaps, China was the largest market in the fourth, for both this season and next.  Cancellations of US sales for China have not been recorded on the scale that many had anticipated when the additional tariff of 25 percent was confirmed in early July.  The absence of any serious disruption to trade flows would suggest that, thus far at least, mills have access to sufficient ‘processing trade’ import quota (which allows for reimbursement of the tariffs) to absorb the flow of shipments. As at August 23, outstanding US sales commitments for shipment to China during the current marketing year stood at about 425,000 tonnes.

Despite a recent slowdown in the pace of US export sales, the scale of commitments for shipment to all destinations in 2018/19 season remains substantial – already equivalent to about 58 percent of USDA’s projection for the season, which was raised to 15,500,000 bales (480 lbs) in the Department’s August supply and demand report. That would represent the third largest export volume on record.

 

Despite the surprise increase in the crop forecast, both US and global cotton supply and demand fundamentals remain broadly supportive of the outlook for prices during and beyond this season.  Cotton Outlook’s late-August forecast was that world production would this season fall short of consumption by over a million tonnes. A quantum leap in China’s import demand seems inevitable, though its timing cannot be predicted with any confidence. The main threat to the prevailing price structure would seem to lurk in the uncertain macro-economic environment (witness the past month’s further deterioration of Sino-US trade relations) and the worsening financial difficulties of various ‘emerging’ markets.