January 16, 2012

 

Cotton prices lower as Chinese buying is questioned

Cotton prices hovered around negative territory on Friday (Jan 13) amid a debate among investors over how significantly Chinese buying can prevent prices succumbing to worsened world fundamentals.

                    

A report on CottonChina.org, a China-based industry website, says that the country is to issue a further 1.1 million tonnes in import quota was seen as helping New York futures prices avoid a steeper decline on Thursday (Jan 12) from what was considered a bearish set of USDA data.

 

However, on Friday (Jan 13) cotton prices did the reverse losing early gains as analysts questioned what protection Chinese buying would afford from worsened supply and demand fundamentals.

 

New York's March contract closed 0.2% lower at 95.73 cents a pound.

 

The USDA revisions put cotton's stocks-to-use ratio - a much watched metric in commodity markets in signalling the availability of supplies above 53%, taking it to its second highest level of the last decade.

 

"Despite the expectations for heavier fundamentals, the New York market remains buoyed by Chinese buying," Rabobank analysts said.

 

However, such purchases "will likely moderate in the first half of 2012, and the fundamentals suggest prices should ease from current levels".

 

A London soft commodities trader said: "You have to question how supportive Chinese buying really is, given that much of it is being used to rebuild state stocks rather than being used. It is not as if this cotton is going to disappear."

 

At Commonwealth Bank of Australia, Luke Mathews was also downbeat on prices, highlighting the extra production likely to be encouraged by prices which, even while down some 60% from last year's record high, remain at historically elevated levels.

 

"With global prices still hovering above 90 cents a pound, we are certain that the world's farmers will be looking to maximise output in the year ahead.

 

"The persistent increases in global cotton inventories will continue to pressure prices lower. The outlook for cotton prices remains bleak."

 

Goldman Sachs, foreseeing a drop in futures to 85 cents a pound over the next six months, said that "the moderate decline in cotton prices that we expect suggests that producers should lock in current deferred prices".

 

In fact, the extra 1.1-million tonne import quota mooted for China is aimed mostly at encouraging mill demand, and so boosting exports of cotton products, CottonChina.org said.

 

Ironically, a huge state stockpiling programme, from both domestic and foreign sources, which will help boost total Chinese inventories by nearly 50% in 2011-12, is expected to have a negative impact on consumption.

 

"The substantial accumulation of cotton in the national reserve is expected to support prices and constrain [domestic] mill use," Karis Gutter, acting US agriculture secretary, said on Thursday (Jan 12).