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High Cotton Price Will Never Easily Be Changed

Author: Jun 29, 2011 09:22

In the first half year of 2011, the domestic cotton price fluctuated greatly in China. From March to May, in ZCE, the price of the cotton futures’ contract 1109 used to drop over 30%. After experienced the surge in 2009 and 2010, will the cotton market still be investable?

The Cotton Price Is Head Back to The Fundamentals

After the economic crisis in 2008, global demand on the cotton increased dramatically. However, influenced by the time-delay of the planting and growing situation, the supply gap enlarged greatly. The gad used to reach 17.02 million bales in 2009/10. Under the short-supply situation of the global cotton marker in 2009 and 2010, the bull market in the cotton’s fundamentals made the cotton price increase continuously, which hit the historical new high successionally.

Since this year, the high cotton price has brought great influence upon the fundamentals. On one hand, the high price stimulated the cotton growers to increased cultivation areas. On the other hand, the high price inhibits the supply. The global cotton demand was lower than the output for the first time after the economic crisis. The cotton fundamentals is also transiting from previously tight supply-demand to balanced supply-demand.

The cotton fundamentals also transformed from extreme tense to balance after the crisis in China. The textile industry recovered very fast after the economic crisis in 2008, which led to the surge of cotton demand; but due to the decreased cultivation areas and nature disasters, the output of cotton reduced from 35 million bales in 2008 to 3.5 million bales in 2010. The storage consumption also dropped to 25.10%.

While entered 2011, the cotton fundamentals became changed. On one hand, high cotton price stimulated the growers to increase the cultivation areas, which may raise the output. On the other hand, the acceleration of the demand in textile industry is slowing down, the orders’ volume is decreasing, and the cotton price decreased from 34,000 Yuan/ton to 25,000 Yuan/ton.

The demand is weak in the first half year in China

China is the biggest cotton consuming and importing country all over the world. The consuming volume of cotton in China accounts 40% for global cotton consumption and the importing volume accounted 40.6% for the global cotton importation. It can be said that Chinese demand is strong enough to change the global cotton prices.

In the first half year of 2011, under great pressure, Chinese cotton textile industry shows a decelerating and short-demand situation. Consider the causes, the increased labor cost, the increased raw material prices, the appreciation of RMB, low operating rate because of the power shortage and the suppressed purchasing power due to financial strains may all make the whole industry, especially the minor enterprises suffered. Besides, the foreign traders transferred some orders from China to countries like Vietnam and Bangladesh which have low costs. The substitution effect also aggravates the decrement of operating rate. Under a variety of factors, the weak demand of textile enterprises laid down the decreasing track of the cotton price which has been over hyped.

The sluggish demand can be verified from the cotton importing data. According to the data disclosed by China Customs on June 21, China imported 144,599 ton of cotton in May, dropped 27% compared with the same period last year. In the first five months this year, the importing volume decreased 11.7% compares with the same period last year to 1.2 million ton. At the same time with reduced importation and increased cotton yarn storage, high-fevered cotton price finally is head back to fundamentals.

Stocking cotton is waiting for selling

Experienced the zoom of cotton price in 2009 and 2010, no matted the growers or the cotton mills, both tasted the huge profits of stocking and selling the cotton. Before the Spring Festival of 2011 in China, insiders all predicted that the operating rate would increase and the market will be in short of supply after the festival and the hyped cotton price would reach another new high. However, in March, April and May after the festival, the cotton price dropped all the way down and the decreasing rate was more than 30%. This fast change in market led a lot of cotton growers and mills not ready to sell the storage and cost great loss.

It is late June now, and after 2 months, new cottons will be on market in China. Judge from the demand of textile enterprises, major enterprises can use the importing cottons which the purchased before and cottons produced in Xinjiang till this August, which is just before the time that new cotton be on market. The minor enterprises are not optimistic about the market afterwards, and they will keep the straddle attitude; the financial strain also limits bulk buying. Under this situation, growers and mills that have stocking cotton will undersell the goods although the price is rebounding, which makes the cotton price be hard to increase dramatically.

China Has Entered An Era of High Cotton Prices
In 2011, the bottom price of cotton that offered by the government is 19,800 Yuan/ton, which surpassed the recording price before August of 2010. Except the supply-demand that determines the prices, the increasing plating cost of cotton is also a important reason that leads the cotton price will not be back to fundamentals.

In China Textile Summit, held on June 13, 2011 in Shanghai, Vice- chairman of CNTAC (China National Textile and Apparel Council), Mr. Gao Yong indicated that China textile industry’s export-led growth has changed. In the past five years, Chinese domestic textile industry increased the proportion of ladder-like, and the domestic sales accounted for 80% last year.

Judge from the market share, China’s textile and clothes industry occupies more than 30% of the international market share and is gradually becoming saturate. Therefore, when observing the cotton textile industry, not only overseas market demand but also domestic demand should both be paid close attention on. With the accelerating of the industrialization and urbanization in China, inhabitants’ income is also increasing and their capacity of afford high price products is enhancing. Increased domestic demand offset the decline in external demand will become a reality. From the perspective of grasp the market, we need to keep eyes on the increasing step of the textile enterprises’ quota.

State Reserve purchasing is the force of increasing

From August to October in 2010, Chinese government sold one million tons of the reserved cotton in succession. The remaining storage was less than 1.3 million tons among the state reserve. As strategic material, the government is running out of state reserved cotton.

After selling the reserved cotton in China, the global cotton price increased all the way up. High cotton price and the short-in-supply situation obstructed Chinese government to restock. Judge from the cotton control needs, it needs the state to cover the cotton storage in large quantities under 10 million tons of cotton consumption every year; only then the government can control the market.

Therefore, the restock of the state reserve will be the focus. See from the possible restocking time, either before the new cotton to be listed, while the cotton price continues to fall back; or after the new cotton be listed, to make the cover when the supply is adequate. No matter when the government chose to restock the cotton, it will be the increasing force of the cotton prices.

High Cotton Price Will Never Easily Be Changed

Author: Jun 29, 2011 09:22

Editor: emma From: 168Tex.com