September 2018 Market Summary
International cotton prices declined considerably during September, influenced by a downward trajectory in New York. The ICE December contract ended the month at its lowest level since February. The sharp falls were prompted by further escalation of the Sino/US trade war. The Cotlook A Index started the period modestly below its highest level registered during the month, of 93.40 US cents per lb, and ended some six cents lower, at 87.20 cents per lb, the weakest since the 2018/19 A Index was introduced in March.
Trade sentiment was dominated by the China/US trade tensions, as well as other macro-economic factors including financial difficulties in emerging markets. Save for a period of quite active buying when prices made their sharp decline, mill activity remained fairly routine; generally, spinners were either covered for a good portion of their forward shipment requirements or were attempting to eke out their inventories in anticipation of bulk Northern Hemisphere new crop arrivals, which they expected would bring further downward pressure to bear on asking rates.
The most notable revival of demand during the price drop was in China, where spinners mindful of the US ‘trade war’ actively enquired for a range of ‘outside’ growths, including Brazilian. Elsewhere, mills in Bangladesh and the Far East took the opportunity to cover gaps in their shipment requirements for the coming month or so, predominantly with lint from the African Franc Zone or the Southern Hemisphere. However, attention remained centred on the behaviour of Chinese spinners in the face of the higher cost of importing US cotton, the approaching end of the 2018 State Reserve auction series and the additional 800,000 tonnes of import quota that was announced earlier this year. Distribution of said quota was expected to occur during September, but no official confirmation had been received by the end of the month, and the Chinese National Day Holiday, running from October 1 to 7, has so far precluded the emergence of any further details.
The 2018 China State Reserve auctions concluded on September 30, having disposed of over 2.5 million tonnes of domestic lint since the series began in March. By Cotlook’s estimate, perhaps slightly less than 2.75 million tonnes remained in state warehouses on that date, the lowest since the end of the 2010/11 season, when government holdings were virtually depleted, a development which shaped government policy in the succeeding years, leading first to an accumulation of burdensome stocks and subsequently to the stock auction programme combined with more restricted imports.
Of the imports permitted, Chinese mills have traditionally favoured US cotton, but the recent trade spat portends less buying from the US, at least in the short to medium term. In the week ending September 20, the US export sales report registered a cancellation for China of 52,000 running bales (500lb), in a move that some observers suggest could mark the beginning of a larger tranche of cancellations in the coming weeks. It should be noted, however, that a commitment of a similar volume was registered for shipment to China in the 2019/20 season.
Of the four US export reports released during the month, Vietnam was cited as the major destination in three. Buying by Chinese-owned entities in Vietnam presumably contributed to the figures. Recognition is widespread that one effect of China’s additional tariff on US cotton imports will be to bolster US sales to other markets. By September 20, commitments of all cotton for shipment in 2018/19 were placed at almost 9.3 million statistical bales (480 lbs). USDA’s export projection for the season is currently placed at 15.7 million bales, a volume which could be easily exceeded if, notwithstanding the Chinese situation, sales retain their current pace.
On the supply and demand front, observers in the US by the end of September had still to assess the full extent of damage caused by Hurricane Florence, which saw fields flooded in wide areas of the Southeast. Initial indications imply that up to 500,000 bales (480 lb) may have been lost, with more cotton suffering damage. Furthermore, untimely rains prevailed across the Southeast, the Memphis Territory and parts of Texas as the month drew to a close.
Cotlook made no alteration to its estimate of US output in anticipation of the prospective hurricane damage, leaving it at 19,235,000 bales (4,188,000 tonnes), as advanced by the USDA in August. USDA increased its number in the September report, a move which will presumably soon be reversed to take account of the losses.
The only other major change to Cotlook’s production estimate in September concerned China, where a sharply amended view emerged of prospects in Xinjiang. The weather in the region during July and August was favourable; whereas a repetition of the previous season’s excellent average yield was formerly thought unlikely it would indeed now seem that this will be exceeded. Xinjiang may thus contribute significantly more to total national output than the 5,040,000 tonnes recorded in 2017/18. Cotlook’s estimate of the national total, which includes production in the ‘mainland’, has been raised to six million tonnes. However, quite a wide variation exists in the numbers put forward by various forecasting bodies.
Cotlook’s estimate of Chinese consumption (including mill and non-mill use) was increased modestly during September, to nine million tonnes. Imports during 2018/19 are projected at two million tonnes. The actual volume depends primarily on government policy decisions in regard to the amount of quota it makes available and whether or not it allows imports to be added to the State Reserve.
The rate of season-on-season growth implied by our world consumption forecast is 3.3 percent. World stocks are expected to fall by 739,000 tonnes, with a decline in China being partially offset by a slight increase in the rest of the world.