February 2019 Market Summary
International cotton prices reversed direction to move lower during February, under the influence of weaker settlements in New York. The Cotlook A Index dipped briefly below the 80-cent mark mid-month, for the first time since early January, but recovered some ground in subsequent days to close over three cents per lb below its opening level, at 80.35.
The major catalysts for the downward trajectory of prices both originated in the United States; first with the publication of the National Cotton Council’s bearish Planting Intentions survey on February 9, and then later in the month with the release of USDA’s aggregated export sales report which covered a six-week period, during which upland registrations failed to surpass the one-million running bale mark, a figure that had been widely anticipated in trade circles.
Although the total volume of new US upland export sales registered during the period was more than 1.3 million bales, cancellations totalled almost 340,000 bales, predominantly from China and Bangladesh. In the latter market, spinners in possession of high-priced stocks bought earlier in the season are unwilling generally to add to their inventories in the face of a difficult downstream market, while the well-publicised and as yet unresolved trade tensions between China and the US are the obvious catalyst for the cancellations from that country. US shipments meanwhile remained fairly robust; the cumulative volume shipped by the week ended February 21 was almost 40 percent of USDA’s projection for the season (15 million 480lb bales).
A hand-to-mouth mood characterised mill buying during February, as spinners on one or two major markets sought to delay shipment against their high-priced purchase contracts where possible, instead preferring to cover their more pressing requirements with cheaper cotton available nearby from various origins. Supplies from the African Franc Zone found buyers in that regard, as did discounted US and Brazilian lots. Mills continued to complain of the difficult trading conditions that have been evident in the yarn market for some time.
A rather more active import demand than had been seen for some time was evident in China, where a divergence of local and international values placed imports at a distinct price advantage. The Cotlook A Index (adjusted to equivalent terms) remained at a discount to the China Cotton Index for most of the month, whether sliding-scale or one percent (TRQ) duty were applied. This prompted a flurry of buying interest for cotton consigned at Chinese ports mid-month, in the approach to the expiry of last year’s sliding-scale quota, predominantly for Brazilian and Australian lint. Mills’ appetite for imported cotton also appeared largely maintained in the immediate aftermath of the deadline, mainly for Indian lots, which represented good value vis-à-vis competing growths.
Customs data released during the period showed that imports in January were the heaviest monthly volume since July 2014, and Australia and Brazil have displaced the US as the major suppliers during the season so far. China’s cumulative imports for the August/January period stand at over one million tonnes. Cotlook’s estimate for the season, of 1.8 million tonnes, may therefore err on the side of caution.
February marked the publication of Cotlook’s necessarily very tentative first estimates of global production and consumption in the 2019/20 season. Our figures imply an increase in production, to 27,182,000 tonnes, owing in part to greater planted area, which has been encouraged by the relative firmness of cotton prices in recent seasons. Even allowing for the latest weakness in the market, the Cotlook A Index remains comfortably above its thirty year average of around 73.00 cents. A recovery of world average yield is also anticipated in expectation of better results in some major growing countries that have been impacted by various factors, including unhelpful weather events, in the current season.
The greatest addition to world production comes from the United States, where the NCC’s above-mentioned planting figure marks an increase of nearly three percent from 2018/19. More significantly, abandonment is also projected to be significantly lower. Our figure therefore implies the largest US crop since 2004/05. Pakistan and India also account for a good portion of the global increase; cotton production in those countries should be supported by various official schemes. The Indian Minimum Support Price guarantees a certain level of return for farmers, while in Pakistan the government is keen to encourage a diversion of land from sugar to cotton.
While attempts to forecast mill use this far in advance represent an even more hazardous task than estimating output, Cotlook’s first assessment indicates that global consumption will increase by around 3.2 percent in 2019/20. Growth is anticipated in some major consuming markets, including China, the Indian subcontinent and Vietnam. At this stage, however, the uncertain economic environment rules out a more forceful presentation of the implied numbers; the highly anticipated outcome of Sino-US trade talks will undoubtedly have the greatest influence on trade patterns in the cotton and textile sector during the year ahead.
When considering the above numbers, world stock levels outside China are expected to rise by a substantial 1,113,000 tonnes by the end of 2019/20. A decline of 598,000 tonnes appears in prospect in China, partially offsetting that increase. World stock levels are therefore expected to rise by 515,000 tonnes.