May 4, 2012

 

Zhengzhou Commodity Exchange's cotton contract reaches new low

 

 

The removal of India's cotton exports ban has affected the most actively traded September cotton contract on the Zhengzhou Commodity Exchange making it hit this year's new low on Wednesday (May 2).

 

Despite the support from the state stockpiling policy, Zhengzhou cotton is expected to extend the weak trend in the following two months pressured by sluggish demand from textile companies and lower import prices, according to Chen Dong, an analyst for Baocheng Futures.

 

High expectations for a decline in global cotton acreage in crop year 2012-13 may help prop up cotton prices.

 

A report released by the International Cotton Advisory Committee projected that the global cotton planting area would drop 7% in the next crop year. The latest data from the National Bureau of Statistics (NBS) shows that China's cotton acreage is likely to shrink 4% this year.

 

Meanwhile, the government has raised the floor purchase price for cotton to RMB20,400/tonne (US$3,234) in the new crop year and this will also lift Zhengzhou cotton futures prices.

 

Since the state stockpiling in the previous crop year finished on March 31, Zhengzhou cotton has been range-bound around RMB21,000/tonne (US$3,329), which will provide a support for cotton futures prices in the long run.

 

Chen predicts that cotton prices will have insufficient rise momentum in the remaining period of the second quarter given the absence of support from demand as well as pressure from imports.

 

According to the NBS, the new-order index for China's textile and garment industries respectively dropped 6.6% and 2.2% month on month in March. In the meantime, the country's export value of textile products and garments rose 13.4% year on year last month, with the growth down 37.2 percentage points from the same period of last year.

 

Lackluster demand from textile industries has led to a sharp rise of the cotton stocks to consumption ratio in the crop year of 2011-12. The ratio is expected to reach 70.65% by the end of the crop year, up 47.7 percentage points year on year, according to the national supervision system for the cotton market.

 

Meanwhile, textile products inventory also stands at a high level. By early April, cloth stocks were equivalent to 56.5 days' sales, up 4.4 days from the previous month and 16.4 days from the same period a year earlier.

 

As the import cotton price is almost RMB17,000/tonne (US$2,695) lower than homegrown cotton prices, strong pressure from imports will also hold down domestic cotton prices. China imported 625,000 tonnes of cotton in March, soaring 126.1% over the same period last year. Its cotton imports in the first quarter totalled 1.57 million tonnes, a jump of 83.9% from the same period a year earlier.