On August 23, China Cotton Reserve Management Co., Ltd. and the National Cotton Trading Market jointly issued the “Announcement on Matters Concerning the Rotation of Central Reserve Cotton in 2021” (hereinafter referred to as the “Announcement”), clarifying that starting from August 24, 2021 Starting from today, the reserve cotton rotation transaction is limited to textile cotton enterprises to participate in the bidding, and it is only for the enterprise’s own use and may not be resold.
Cotton is a vital raw material for cotton spinning enterprises, which largely determines the profitability of cotton textile enterprises. It can be said that from the perspective of cotton costs for downstream enterprises and the health of the industrial chain, relevant agencies have promptly introduced policies to rotate out cotton reserves. So what are the changes in the rules for the rotation of cotton reserves this time? What impact has it had?
This is not the first time that the policy has been introduced
To ensure the cotton needs of cotton textile companies, the announcement clarified that from August 24, 2021 to the end of this year’s rotation, the reserve cotton rotation transaction will only be limited to textile cotton companies participating in the bidding, and non-textile cotton companies will be stopped from participating in the bidding. The reserve cotton purchased by textile cotton enterprises is limited to the enterprise’s own use and may not be resold.
In fact, this announcement is not the first to stop non-textile cotton companies from participating in the bidding for cotton reserves. Since the implementation of the national reserve rotation policy in 2016, it has been introduced twice in 6 years, and this is the third time.
Expert analysis shows that judging from the background and timing of the first two policy introductions, more emphasis is placed on the linkage changes in the internal and external markets. Among them, in the first adjustment in early September 2017, international cotton prices experienced a short-term sharp rise before domestic prices, and the reserve cotton transaction rate suddenly increased from the previous average of 70% to 90%. In the week before the policy was introduced, continuous 100% sales within one week. The second policy was introduced in 2018 when cotton prices were relatively high. Subsequently, the transaction rate of reserved cotton plummeted, with the average transaction rate at around 40%.
The timing of the introduction of this policy in 2021 is also a time when cotton prices in domestic and foreign markets will rise sharply at the same time in the short term. Among them, after the release of the US cotton export weekly report and the USDA August export report on August 12, the driving force for the increase in the external market was stronger. The main ICE cotton futures December contract rose from 91 cents/pound to 96.71 cents/pound in less than 4 trading days. Zheng Cotton’s main 2201 contract rose from the settlement price of 17845 on August 13 to the intraday high of 18505 yuan/ton on August 18, which took less than three trading days.
But what is different from before is that at this stage, spinning mills have sufficient orders, and most finished yarn inventories are at historically low levels. In addition, the transaction price of reserved cotton is still at a discount. For spot goods, textile companies will still actively participate in the auction of reserve cotton, effectively supplementing factory cotton demand.
It is understood that most textile enterprises currently have tight order schedules, and orders can be maintained for 20 to 30 days. The supply of pure cotton 32S and 40S yarns in spinning mills is tight, and large quantities of goods are needed. It will take about a week to ship. Spin mills are more willing to raise prices when finished product inventories are low, mainly delivering early orders from traders. It is expected that textile enterprises’ product inventories will remain at a low level in the short term.
Since August, the overall market for yarns, which was originally strong, has weakened. The current trading atmosphere in the spot market of pure cotton yarn is not good and the trading volume is declining. Affected by the sluggish downstream demand and the correction of cotton prices, the quotations of textile enterprises have been relaxed, and the prices of conventional varieties have been reduced from 200 yuan/ton to 300 yuan/ton. There is a lack of new orders, but companies are still rushing to make early orders, so inventories are still at historically low levels.
Cotton and cotton yarn futures prices fell back
The day after the announcement, The closing price of cotton futures CF2201 fell sharply by more than 400 yuan/ton. The contract hit 17,365 yuan/ton, a new low in the past two weeks. As domestic cotton futures prices continue to rise, the introduction of this announcement has significantly cooled down the hot cotton futures market in the short term.
Statistical data shows that the price of cotton spinning raw materials increased significantly in the first half of this year. From July 1st to August 23rd, the main cotton futures contract in Zhengzhou increased by 12%, and the cotton yarn futures price increased by 12%. 2201 increased by 10%. Cotton futures prices hit a new high in the past three years. After breaking through 18,500 yuan/ton, they have recently fallen sharply back to around 17,500 yuan/ton. Affected by this, the market has a strong wait-and-see atmosphere, and downstream purchases are mostly on-demand.
Affected by the adjustment of the reserve cotton rotation policy, cotton and cotton yarn futures prices fell sharply on August 24. The cotton spot trading atmosphere was good, point-price transactions were more active, and some spinning Enterprises and traders purchase at low prices. On August 24, CF201 closed at 17,385 yuan/ton, down 475 yuan/ton from the previous trading day, a decrease of 2.66%. On August 24, the domestic reserve cotton auction was still 100% completed, but the average transaction price dropped sharply by 611 yuan/ton to 17,186 yuan/ton, and the price at 3128B discount was 18,389 yuan/ton, a decrease of 582 yuan/ton from the previous day. In addition, on the same day, the settlement price of cotton yarn futures CY2201 contract fell by 75 yuan/ton to 25,770 yuan/ton.
Industry expert analysis shows that since the reserve sales this year, the proportion of traders participating in bidding has reached 57%. Traders have a large amount of funds, which has pushed up prices to a certain extent. In addition, Some textile companies have not opened auctions and reserves, so the market predicts that transaction volume will decline in the later period, and based on historical experience, there is concern that cotton prices will be further under pressure.
Curb excessive capital speculation in cotton
In the first half of this year, a large amount of capital poured into the cotton and even cotton yarn futures markets for investment. The sharp rise in cotton futures prices made industry insiders worry that excessive raw material costs would destroy the normal textile industry.
In this regard, industry experts said that the latest policy on cotton reservesThe implementation of � demonstrates the country’s determination to maintain the healthy development of the textile industry chain. The announcement is mainly to ensure cotton spinning enterprises use cotton, facilitate cotton spinning enterprises purchasing cotton, and reduce the risk of enterprises purchasing raw materials. Since the announcement strictly supervises the rotation of cotton reserves and prevents capitalization operations, it will partially curb cotton speculation in the short to medium term, and further stabilization of cotton prices will be conducive to the stable operation of cotton-using enterprises. Currently, there is still a month until new cotton is launched, and the market has high expectations for the launch of seed cotton. It is expected that even if the purchase price of new cotton rises to 8 to 10 yuan per kilogram this year, there will be ginners rushing to harvest it.
In terms of market demand, experts analyzed that due to the impact of the epidemic and the different progress of economic recovery at home and abroad, the performance of external demand and domestic demand for textile and apparel is not synchronized.
In terms of external demand, from January to July, textile exports denominated in US dollars decreased by 10.8% year-on-year, an increase of 15.7% compared with the same period in 2019; clothing exports increased by 32.9% year-on-year, compared with the same period last year. The same period in 2019 increased by 7.0%. Among them, in July, textile exports fell by 26.7% year-on-year and 6.5% month-on-month; clothing exports increased by 8.3% year-on-year and 9.4% month-on-month. With the recovery of the global economy, coupled with the early placement of Christmas orders and the transfer of orders in some regions, clothing exports continue to grow.
In terms of domestic demand, from January to July, domestic retail sales of clothing and textiles increased by 29.8% year-on-year, an increase of only 2.3% compared with the same period in 2019. Among them, retail sales of clothing and textiles increased by 7.5% year-on-year in July. The domestic economy is recovering normally, and domestic retail sales of clothing and textile products have only increased slightly compared with before the epidemic. Overseas stimulus policies continue to increase. External demand for textiles and clothing is significantly better than domestic demand. However, domestic sales peak season orders have not yet started. It is recommended that companies pay attention to the placement of export orders and domestic sales orders.
From the perspective of specific links in the industrial chain, from January to July, yarn production increased by 16.0% year-on-year, down 11.8% from the same period in 2019; cloth production increased by 12.7% year-on-year. A decrease of 28.7% compared with the same period in 2019. Recently, the profit margin of cotton yarn is relatively large, while the profits of gray fabrics are constantly being squeezed, and the downstream profit transmission is not smooth. The inventory performance of different links is also different. Textile enterprises still have active demand for replenishment of cotton raw materials, finished cotton yarn inventory is low, and weaving mill inventory increased slightly.
Currently, cotton futures prices have fallen sharply, and it is expected that yarn prices may fall back in the short term. However, the current order schedule of yarn mills is tight, and the inventory of finished products in pure cotton yarn mills remains at a low level. Orders can be maintained until the end of September, and there is still some support for cotton prices. It is expected that cotton prices may fluctuate in the short term. </p
