Cotton mart sees bullish signals as deficit looms

The Business Line, June 06, 2018


The world cotton market may be poised for a bull run in the months ahead as the market fundamentals are changing. With global consumption in 2018-19 projected to run ahead of production and ending stocks set to decline to multi-year lows, prices could only be headed north.

The China factor

But a more important reason for the emerging bullish sentiment is that China, arguably the world’s largest stakeholder in cotton, could be back in the market with a bang. The Chinese announcement that the country intends to raise its cotton imports with reduced-duty is seen as a positive for the market.In recent years, China’s cotton import volumes had declined drastically as the country continued to liquidate large inventory. The Asian major’s annual imports are currently close to a million tonnes , less than a third as compared with peak imports until five years ago. But, of late, cotton prices in the Chinese market have escalated sharply, prompting the authorities to think about rebuilding stocks.

Weather vagaries

But that’s not all. Weather issues have come to the fore. Xinjiang region, accounting for three-fourth of China’s cotton area, is facing adverse weather which is seen fanning fears of tightening supplies. In the US, potential drought conditions in West Texas are seen affecting a quarter of the US crop, although rains in the last two days have brought some relief.
In India, planted area for cotton may decline by up to a million hectares following the attack of bollworm last season in a few States. The interventions were ineffective and growers have turned wary. Lower planted area will reduce harvest size. The tentative production target for 2018-19 is 35.5 million bales (of 170 kg each).

Tighter supplies

All these point to supply concerns, especially quality supplies, in the next season while demand looks robust, encouraged by strong global economic growth. According to the Washington DC-based International Cotton Advisory Committee, world cotton production for 2018-19 is projected at 25.75 million tonnes (26.57 mt), while consumption is estimated at 26.72 mt (25.49 mt).
Importantly, world trade in 2018-19 is projected to rise to 9.19 mt from last year’s 8.77 mt of the previous year. In other words, the fundamentals are set to tighten in the months ahead.
In such a tight scenario, the potential entry of China could be disruptive. While growers in exporting nations such as the US and India would rejoice at the prospect of a price rise, importing and consuming countries are likely to bear the brunt of high prices.

Higher prices

The Cotlook A-Index is currently projected at 81 cents per pound for 2018-19. However, considering the emerging scenario, prices have the potential to rise by as much as 25 per cent and touch the psychological 100 cents and breach it decisively. This possibility arises because speculative capital is waiting in the wings and will move in swiftly which in turn will exaggerate the price action.
As the world’s largest exporter the US is expected to substantially benefit from China’s imports. Cotton exports out of India are also likely to accelerate especially because of the depreciated value of the rupee. In recent years, Bangladesh has emerged as an important buyer of Indian cotton.
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