January 2018 Market Summary
The upward momentum of international cotton prices persisted during the first half of January, influenced by sustained higher settlements in New York, before the market reversed direction to end slightly below the levels in evidence at the beginning of the month. The Cotlook A Index rose steadily for most of the period, and on January 22 registered 94.10 US cents per lb, the firmest value recorded by the 2017/18 Index since its introduction in late March, and roughly 15 cents higher than at the beginning of the season (August 1). The subsequent sharp reversal in prices saw the Index settle on January 31 at 87.60 cents per lb.
Speculative buying in New York remained a supportive feature for most of the period, as well as the huge volume of unfixed on-call sales on nearby ICE futures, which posted a record high mid-month. However, a subsequent sell-off and resulting steep decline in prices provided some mills with an opportunity to fix their outstanding purchase contracts at more palatable levels than had until recently seemed likely. A broader-based level of enquiry than had been witnessed in recent months emerged with the downturn, and business in various upland growths was arranged. Mill buyers tentatively broke from their pattern of short covering for urgent prompt shipment requirements, and some business further forward was witnessed.
Toward the end of the month, some downward pressure was exerted on local cotton prices in India. Export offers from that origin cheapened in comparison with competing growths, and regular business in Indian was witnessed for mills in Pakistan and Bangladesh, among some other markets. The total volume is thought to remain relatively modest, however, and Indian cotton would need to cheapen further in order to attract considerable market share from other origins.
US export commitments have continued at a strong pace. The aggressive marketing of discounted low Micronaire lint, mentioned in our last monthly report, persisted during January; that cotton continued to attract attention from spinners unable to meet sellers’ higher asking rates for better quality lots. By January 25, cumulative sales (upland and Pima) were equivalent to around 12.63 million 480 lb bales, representing over 85 percent of USDA’s projection for the season. Weekly shipments registered a marketing-year high, however, the pace of shipments has continued to lag, with only around one third of the upland sales commitment shipped by the same date.
Weekly export commitments in early January showed a significant volume of cancellations, predominantly for China. Domestic prices on that market have continued to show a downward trajectory, in face of a bumper crop in major growing region Xinjiang. Further supply will also become available in March, when this year’s State Reserve auctions are scheduled to commence. The strong rally in international prices and declining local values have therefore diminished some of the price advantage typically associated with import purchases. Apart from a short-lived spike in demand, presumably to cover immediate requirements ahead of the auction series, mills in receipt of 2018 import quota have approached international purchases with caution.
Cotlook’s estimate of Chinese output was raised by 190,000 tonnes in January, to 5.67 million tonnes, owing entirely to an expectation of increased yield in Xinjiang. A minor adjustment concerns the US, the figure for which has been reduced slightly in line with USDA’s estimate of 21.26 million bales (4,629,000 tonnes). That number remains roughly 24 percent above production in 2016/17, and represents the greatest output since 2006/07. Average US yield is currently estimated at over 1,000 kilos per hectare, which would be the highest ever achieved.
Changes were also made to the figures for Mexico and Pakistan. In the former origin, production looks to have increased by more than 100 percent, by Washington’s estimate. In the latter, late seed cotton arrivals have continued at a good pace. Our expectation of output has been increased to almost 1.79 million tonnes. Pink bollworm has continued to cause issues in India, but nevertheless Cotlook’s number remains unchanged this month, at 6.375 million tonnes.
On the consumption front, the only notable change in January was for China, where our estimate was raised by 240,000 tonnes, to 8.6 million, the greatest since 2010/11. Sustained government investment in the downstream industry has continued to support the strengthening outlook for mill use.
As a result of the above changes, Cotlook’s forecast of world production was raised by almost 300,000 tonnes in January, to 26.127 million, the third highest of the past decade. Consumption was also increased considerably, to 25.8 million tonnes. That level represents the highest since prior to the financial crisis of 2008/09. An addition to global stock levels therefore remains in prospect at the end of 2017/18, of 324,000 tonnes, up from 259,000 a month earlier. In China, stocks are expected to decrease by some 1.84 million tonnes. However, that fall is still more than offset by a considerable rise in the rest of the world, of 2.1 million tonnes.
Cotton Outlook’s initial forecasts of production and consumption during the 2018/19 season will be published next month. The unexpected strength of prices over recent months seems likely to sustain enthusiasm for cotton in major producing countries. The more active mill demand in evidence over recent months should, if sustained, support a further increase in global consumption, though growth may be confined to a relatively small number of countries.