May 2018 Market Summary
International cotton prices staged a dramatic rally during May, which saw both the Current and Forward A Indices exceed the dollar mark, the first time that threshold has been passed since April 2012. The 2017/18 Index reached a seasonal high of 100.70 US cents per lb on May 30, before reversing direction to end the month slightly below that level at 99.95, still considerably above the longer-term average. The catalyst for the rally was a sustained bullish trend in China’s ZCE futures market, accompanied by massive rises in turnover and open interest. That quite dramatic movement was in turn reflected in a run of sharply higher settlements in New York.
The Forward 2018/19 A Index (reflecting cotton for shipment no earlier than October/November) was showing a discount in relation to the Current Index at the beginning of the month, but by May 31 the Forward Index had climbed by a staggering 12 cents, to be quoted at 102.35 US cents per lb, some 240 cent points above the current season’s value. May marks the first time that the 2018/19 Index has displayed a premium over the Current Index since its introduction on March 16. The Forward Index was initially calculated at 89.25 cents per lb, which represented a discount in relation to the Current Index of 360 cent points on that date.
The persistence of buying cotton ‘on-call’ New York futures has continued. Spinners with outstanding contracts have been reluctant to fix prices against such ‘on-call’ purchases in face of the prevailing high prices; the direction of futures during May afforded little opportunity to lock in more favourable levels. Spinners have therefore faced a choice of accepting the going price or seeking to roll their commitments into December.
Mill demand, which had already been following a persistently selective pattern in recent months, was further stifled by the latest price run. A fair proportion of spinners are nevertheless thought to have covered their requirements through to the third quarter.
Discounted Indian cotton, which had previously attracted good market share on price considerations, moved strongly firmer late in the month and demand for that origin also tailed off as prices rose.
US cotton continued to buck the trend somewhat, with many spinners turning to this source, particularly for ‘recaps’, to cover outstanding gaps in their requirements. By the week ended May 31, cumulative US export sales registrations were equivalent to 1.96 million bales (480 lbs) more than USDA’s forecast for the season (of 15.5 million bales). Sales commitments unshipped at the end of the season (July 31) will boost a forward US sales commitment (for shipment in 2018/19) that is already high. The upland total by May 31 had already reached nearly 4.7 million 480 lb bales. China accounted for over a quarter of those forward commitments.
Internally in China, a bout of speculative buying pushed ZCE futures and spot market prices substantially higher. Some of the stimulus for the upward movement was attributed to less than favourable weather during May in Xinjiang, the main producing region. Another factor cited was the further reduction in State Reserve stocks. The volume sold at this season’s auction series, which began on March 12, was by May 31 approaching 1.1 million tonnes. Late in the period, the daily catalogue sold out in consecutive sessions. Official sources have made clear their intention to maintain the volume offered daily and have expressed a willingness to extend the auction period (like last year) to the end of September, rather than the end of August. However, the dwindling size of the Reserve is widely acknowledged. In early June, the government reacted to the price hike by limiting participation in the auctions to spinners, for their own account only, and by indicating that more sliding-scale import quota will be allocated in the ‘near term’.
As for the rest of the world, the major change to 2018/19 production numbers in May concerned the US, where the important West Texas growing region continued to suffer from severe drought. As a result, Cotlook’s US forecast was lowered by 107,000 tonnes, to 4.213 million. Smaller reductions were made to figures for Australia and Pakistan, also owing predominantly to lower water availability. As a result, global production was lowered by 185,000 tonnes, to 26.052 million. Consumption was virtually unchanged, at 26.129 million tonnes. Cotlook therefore envisages global stock levels will decrease by 719,000 tonnes at the end of 2018/19, with a reduction in China being partially offset by an increase in the rest of the world. The assumption, for the time being, is that China’s imports will rise during that season to around 1.6 million tonnes, from around 1.1 million in 2016/17 and 2017/18.