October 2018 Market Summary
International cotton prices traded within a fairly narrow range during most of October, but became more volatile late in the month. The Cotlook A Index started the period at 86.00 US cents per lb, hitting a high point of 89.25 on October 23, prompted by sharply higher settlements on ICE futures. The Index subsequently relinquished those gains owing to a reversal of price direction in New York, to end the period only marginally above its opening level, and some 15 percent below the peak attained in mid-June.
Since then, confidence in the outlook for prices has been undermined by the dual threat posed to consumption by financial difficulties in various ‘emerging’ markets and the possible escalation of the Sino-US trade war. Mill buying during the month was characterised by weak demand and a general mood of apprehension. Spinners tended to remain on the sidelines for all but their most pressing requirements and adhered to gap-filling purchases.
Some increased import buying was noted from Chinese state-owned enterprises in the margins of the International Cotton Association’s annual trade event, held in Hong Kong mid-month. Substantial purchases of Brazilian were mentioned in this regard. However, the recent availability to China’s spinners of allocations from the additional 800,000-tonne sliding-scale import quota that was announced in June appears to have done little to encourage import buying by mills. The lack of a clear price incentive for imported lint vis-a-vis domestic cotton, coupled with a comfortable domestic supply position and apprehension at the failure to resolve trade issues, have seen import demand remain at a low ebb.
That sentiment has continued to be reflected in USDA’s weekly export reports; all of October’s reports included considerable reductions and destination changes for US cotton committed to China. However, those cancellations were often offset by additions to China’s import commitment for shipment in 2019/20. By the week ended October 25, China accounted for close to half of US upland sales registrations for next season.
The overall pace of US export sales generally was sluggish in October and a net reduction in this season’s sales commitment was registered late in the month, again owing mainly to reductions for China. Vietnam, which had until recently been named as a major destination in virtually every weekly report, has since become less of a feature. By the end of the month, commitments of both upland and Pima were equivalent to about 9.8 million statistical bales (480 lbs), against USDA’s current estimate for the season of 15.5 million. Just a month ago, it seemed likely that US exports may exceed that level, notwithstanding the Chinese situation. However, the recent slowdown in the pace of sales, and the lack of any progress as regards a resolution of the Sino/US trade war, have caused some observers to view that projection as somewhat optimistic, barring a major change in mill sentiment during the coming months.
Meanwhile, US production estimates have again been under scrutiny. Shortly before the publication of USDA’s October supply and demand estimates, the second major hurricane of the season – Michael –proceeded to inflict yet more damage on cotton fields in Georgia and neighbouring states. The result was that for the second month running, USDA’s estimates had already been overtaken by events by the time of their publication. A substantive assessment of the impact of Hurricane Michael is still awaited, but the damage seems to have been significant. For the time being, Cotlook’s estimate of US production remains at 19,235,000 bales (4,188,000 tonnes), the number proposed by USDA in August, before either of the two hurricanes arrived.
Elsewhere in the world, a sizeable reduction to Cotlook’s estimate of production in Central Asia was advanced this month, of 58,000 tonnes. A combination of cool conditions at the start of the growing season, a lack of irrigation water and very high temperatures in the summer have meant that yields in Uzbekistan, Turkmenistan and Tajikistan are now likely to be lower than previously anticipated. Likewise, in Pakistan, persistent pest attacks have resulted in a downgrading of expectations by 75,000 tonnes, to 1.75 million.
By contrast, the marked increase in output in Benin is the standout figure in a largely optimistic picture for the African Franc Zone, which when taken as a whole appears to be on course to set a new record in 2018/19. Overall production is now forecast to be 1,252,000 tonnes, an increase of over 100,000 tonnes on last month’s estimate. In aggregate, these adjustments give rise to an estimate of world production that is modestly lower than our September figure, at 26,373,000 tonnes.
On the global consumption front, the aforementioned economic difficulties have cast a cloud over the prospects for the remainder of the season. For the time being, we nonetheless place world consumption at just over 27,000,000 tonnes, a threshold never before crossed. In China, our estimate is so far maintained at nine million tonnes, pending further developments on the trade front. The US President has already mooted the possibility of extending increased tariffs to all remaining goods imported from China, a category that would include cotton apparel goods valued at more than US$10 billion (27 percent by value of US import shipments in that category from all sources).
The only major change to Cotlook’s consumption figures was for Turkey, where spinners have been faced with a collapsing currency in recent weeks and are encountering the utmost difficulty in obtaining finance for raw cotton purchases. As a result, mill activity has slowed appreciably. Our October forecast for 2018/19 was reduced by 100,000 tonnes, but a further downturn for that country or others similarly affected cannot be ruled out if conditions do not soon stabilise.
The rate of season-on-season growth implied by our world consumption forecast is 3 percent, slightly lower than last month. Partly in consequence of this change, world stocks are now expected to fall by 664,000 tonnes, less than was foreseen in September, with a decline in China partially offset by a slight increase in the rest of the world.