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Cotlook Indices

Cotlook 'A' Index 74.00 (+1.20) 13:32 GMT 16th Oct, 2019

September 2017 Market Summary

International cotton prices broke out of their recent trading range during September, moving sharply higher early in the month before reversing direction to end the period modestly below the opening level. The Cotlook A Index was propelled to a high point of 84.70 US cents per lb on September 6, following a rally in New York. The rise in prices was prompted by weather events over the Americas, including Hurricane Irma, which threatened to dent US output. ICE futures subsequently underwent a correction, as the weather settled. The Index declined sharply in consecutive sessions and continued in a range-bound pattern for the duration of the month, closing at 79.05 US cents per lb.

Market activity has remained dull. Purchasing was selective throughout most of the month. Lots of old crop cotton available nearby have continued to find buyers among mills with gaps to fill, most notably African Franc Zone cotton, which commanded strong basis levels. However, the supply of 2016/17 cotton is all but depleted and spinners with urgent requirements have turned to various other growths, including Central Asian and Southern Hemisphere origins. Indian cotton also attracted some attention late in the month. For the most part, though, spinners’ perception is that the approach of new crop cotton in the coming weeks will bring pressure to bear on international asking rates, particularly for supplies from the United States and India (both of which are expected to produce bumper crops this season). In this regard, trade observers suggest that many mills appear content to make do with current inventories, and are reluctant to contemplate volume purchases at prevailing levels.

The exception to the pattern of short covering on the buying side continued to be certain Far Eastern markets, including South Korea, which concluded business further forward into 2018, and even some sporadic purchases for delivery in 2019. Mill fixations were a feature during the market’s decline, but it has been noted that a considerable volume of fixations remain outstanding, presumably as mills await better opportunities.

On the sales side, marketing of the already well-committed United States 2017/18 crop was further bolstered in September. US cotton continued to attract relatively good demand, with spinners’ enthusiasm dipping only during the period when ICE futures shot out of their recent range; the result was that total upland and Pima commitments stood at over 50 percent of Washington’s export projection for the season by the week ended September 21. Shipment offers have for the most part been pushed beyond the turn of the year, owing to the increasing difficulty of securing cotton for fourth quarter delivery.

Although the above-mentioned weather events caused some concern regarding the timely movement of US cotton (it was thought early shipments may be delayed and thus provide further support to export offers), the eventual size of the crop appears not to have been affected to a significant degree. However, USDA’s October report (reflecting crop conditions at the beginning of the month) is expected to be more revealing. Cotlook currently envisages a US crop of over 4.5 million tonnes, an increase of over 100,000 tonnes from our August estimate and the highest since the 2006/07 season, but some one million statistical bales (480 lb) below USDA’s last figure.

The other major changes made to Cotlook’s assessment of global production have concerned further increases for India and China.

In the former, planted area is reported to have increased by 13 percent from 2016/17, and a spell of late-season Monsoon rain boosted confidence in yields (though picking was to some extent hindered by the receipt of moisture at this stage in the season). The result was that, by late September, our calculations implied an outturn of 38.5 million bales of 170 kilos, which would be some 12 percent more than last year. Whether the weight of the crop will see Indian prices fall far enough to trigger buying by the Cotton Corporation (at the government-determined Minimum Support Price) will be watched with interest; should the MSP be reached, an effective floor will be established under the Indian cotton market.

In the latter country, reports of yields have been consistently positive and early harvest results suggest that the optimism appears not to have been misplaced. Several major forecasters, including the China Cotton Association, have recently increased their projections of lint outturn; Cotlook’s figure was placed in September at 5.3 million tonnes, at the lower end of the range, and a further rise cannot at this stage be ruled out.

The outlook for consumption in China underwent a further increase during September. Estimates of spinning capacity, particularly in Xinjiang, continue to be revised upwards. The persistent demand witnessed at State Reserve auctions is supportive of the adjustment. The auction series continued to attract robust demand during September, the final month of sales (following an extension from the initial end date of August 31), and the total volume of cotton disposed of via auctions in 2017 amounted to over 3.2 million tonnes. By Cotlook’s calculation, the volume remaining in government hands stands at below 5.3 million tonnes – enough to satisfy mill consumption at its current pace for around seven months. Some conjecture has circulated that the government will recommence rotating new crop cotton into the reserve in 2018, by buying new crop (mainly from Xinjiang), so as to adjust the quality profile of reserve stocks and facilitate another auction series in 2018. No mention has been forthcoming of a relaxation of import restrictions (which limit the annual volume to the 894,000 tonnes, at a tariff rate of one percent, associated with China’s WTO membership).

No other major changes were made to Cotlook’s estimates of consumption in September. As a result of the above adjustments, an addition to global stock levels of over 800,000 tonnes therefore appears in prospect at the end of 2017/18, up from the 589,000 put forward a month earlier. However, as has been the case for some time, a considerable reduction to stocks in China disguises the situation in the ‘rest of the world’, where an addition several times greater is foreseen.