Fall, fall, fall, cotton is falling again!
Since the Federal Reserve’s interest rate hike in June triggered fears of an economic recession, cotton prices have begun to fall rapidly. Specifically, from June 15th to July 25th, the cotton futures price dropped from 20,365 yuan/ton to 15,195 yuan/ton, a decrease of 25.39%, and the spot price dropped from 20,850 yuan/ton to 15,800 yuan/ton, a decrease of 24.22% %.
After hitting a new low this year, cotton prices are still hovering at low levels in recent days. Not only are prices failing to rise, but purchasing volumes are also in a downturn due to factors such as the traditional off-season in the textile industry. Companies have insufficient new orders and downstream consumption is weak. Therefore, cotton companies are under increasing pressure and are constantly lowering their sales quotations. Domestic cotton prices are under pressure and are weakly declining.
On July 13, the first batch of central reserve cotton in 2022 was launched, with a total planned amount of 300,000-500,000 tons. This rotation policy had a certain supporting effect on cotton prices, and then cotton prices began to stop falling. It is still hovering at a low level, indicating that it is still difficult to form a sustained rebound. The crux of the plummeting cotton market is still the continued weak demand, which has led to loose cotton supply.
Be cautious in downstream purchasing
This year, sluggish demand in the textile industry is the most important symptom. Especially in the first half of the year, under the influence of the domestic epidemic, the domestic sales market was also affected, and orders dropped significantly. At present, because downstream textile companies are in the traditional off-season and lack new orders, manufacturers are less enthusiastic about purchasing. The prices of raw materials have been significantly reduced, and orders have been less transacted. Some orders were placed only after the raw materials stabilized. Some gauze mills have lowered their gauze prices below cost and suffered losses. They are increasing efforts to promote sales and withdraw funds to purchase low-priced raw materials to relieve pressure. In terms of printing and dyeing, there are also insufficient machines due to the low number of orders and hot weather. Most of the orders we make are in small batches, and the price of large-volume orders is highly competitive. The status of subsequent intended orders is unclear.
Cotton stocks have reached high levels
In terms of inventory, this year due to good weather, excellent cotton production, and reduced downstream demand, inventories continue to rise. According to statistics, cotton commercial stocks in June were 3.84 million tons, which is still at a high level in recent years. The first batch of central reserve cotton has been launched, but the maximum number of this batch is 500,000 tons, which is equivalent to consuming 13% of the inventory. Although the 13% destocking volume can play a certain role in alleviating inventory, especially the capital flow of enterprises, there is still a long way to go for the entire destocking. At the same time, as September approaches, the launch date of new cotton is also approaching. The Xinjiang-related bill also curbs cotton sales, so the overall supply is relatively loose.
Downstream cotton yarn and gray fabric inventories are at historically high levels. The finished product inventory of most yarn companies lasts for more than one month, especially forty or fifty days. Some enterprises with high pressure have inventories of about two months. The operating rate of downstream weaving enterprises is also at a historically low level due to the off-season and high temperatures. Whether subsequent demand can improve significantly will be the key to the cotton market, and September, the traditional peak season, may be a turning point.
On the macro front, when the Federal Reserve sharply raised interest rates by 75 basis points, industry concerns about economic recession spread, and the commodity market generally fell. The market is rumored to maintain a substantial interest rate hike in July, so the current market sensitivity is still high, and commodity trends will also fluctuate accordingly. The news of the release of cotton reserves and the increase in imported cotton has made market participants feel somewhat relieved, and it is also very timely to meet the needs of cotton-using enterprises. Although there are still uncertainties in Sino-US trade, it still plays a easing role.
Whether the falling cotton can bottom out and rebound depends on whether the traditional peak season in September can arrive as scheduled, as well as the supply and import demand of cotton itself.
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