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International cotton prices rise, as china's state reserve sales look unlikely to stem imports significantly

International cotton prices rise, as china's state reserve sales look unlikely to stem imports significantly Source:
Date: 23-01-2013
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Perhaps the salient feature of the week in cotton trading was the start of state reserve auctions in China on January 14. A total of 318,067 tones was offered during the first 5 days, of which 174,346 tones were sold, representing a take-up rate of only 55%.  No indication was forthcoming regarding the total volume from the reserves that would be sold at this series of auctions.  In addition, reports suggested no additional import quota had been made available to those purchasing at the auction, therefore casting doubt on expectations before the auctions that mills purchasing state reserves would be permitted to import cotton at a 3:1 ratio.

Mills’ enthusiasm for taking up the cotton offered was tempered by both price (the average values at which purchases were made was just below 19,000 Yuan per tone (139.00 US cents per lb) and the quality considerations (the bulk of the sales catalogue comprised very low grades from crop years dating back to 2005).

As no additional release of import quota has been associated with the sales of state reserves, they are generally considered insufficient to meet mills’ requirements (both in terms of volume and quantity).  Moreover, analysis would suggest that it may still be attractive for local spinners to import cotton without quota, incurring the full 40% duty, at prices in the low-80s US cents per lb.

As a consequence, developments in China this week were generally considered neutral or slightly friendly towards international prices and may have contributed to the further rise witnessed in New York futures (though many commodity markets gained ground last week). By January 18, the spot month in New York had reached its highest level of the season.  US export sales have remained strong , with close to 10 million bales (480 lbs) having been either committed or shipped by January 10, against the USDA’s export forecast for the season of 12.2 million bales. 

Certificated stocks (supplies which can be delivered against the New York futures contract) have increased from the lows witnessed towards the end of last year, but at just over 100,000 bales remain relatively low by historical standards.  If exports of US cotton do not tail off to any great extent then certificated stocks could remain low for the remainder of the season, a supportive factor for futures. Trading activity on the main import markets was generally steady to slow, with the rise in futures pushing prices for many growths above levels mills were generally willing to pay. One major exception was Indian cotton, with Shankar-6 still available in the low-80s US cents per lb. Good volumes are understood to have been sold into China last week direct from that origin.

Spot rates in India and Pakistan remained relatively firm. With mills in those countries making good sales of yarn to China, demand for domestic cotton was again fairly robust, helping to sustain prices.  Offers of Shankar-6 in the Indian state of Gujarat were pitched close to Rs. 34,000 per candy (just over 80.00 US cents per lb), ex-gin, on January 18, modestly higher than a week earlier. The Karachi Cotton Association’s spot rate fell modestly to Rs. 5,950 per mound (roughly 73.75 US cents per lb).

WTiN Outlook: cotton general consensus for many months has been that the weight of record global stocks would eventually take a toll of international prices. However, that bearish assessment of price outlook is increasingly being questioned.

The cotton market is essentially operating at two speeds. In China, stocks are accumulating this season to massive levels, mills are suffering owing to an inability to source cotton at competitive rates and consumption is falling dramatically. However, outside of China, consumption is rising, with mills in Asia selling good quantities of yarn to China, which, along with the willingness of Chinese mills to import cotton with the full 40% duty, is absorbing available new crop supplies at a greater rate than was widely anticipated.

As had been assumed, Beijing was influenced to act last week to release some stocks back to the market and be seen to be providing support to the local spinning industry.

Nevertheless, as described above, the prices asked so far have been too high to turn mills away from more attractive imports, even without the distribution of additional import quota. Domestic prices in China in the open market still remain high and at a huge disparity to international rates (see accompanying chart).The outlook for prices in China would seem distinctly bearish in face of signals that the government will need to continue releasing state reserve stocks in order to supply mills, having procured well over 80% of this season’s domestic crop. However, the key questions are at what price, over what timeframe and in what quantities state reserves will be made available to mills. 

The answers to these questions will determine whether international prices will rise to meet falling Chinese values, as supplies in the rest of the world tighten, or whether demand from China (of both cotton and cotton yarn) will come to a sufficiently abrupt halt to ensure that enough cotton remains outside of China to weigh on global price sentiment.
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