July 2, 2012

 

 

China has withdrawn its orders of 600,000 running bales of cotton from the US, leaving American merchants with their worst week for cancellations since the 1980s.

 

The US chalked up net export sales cancellations of 602,100 running bales for 2011-12 in the week to last Thursday (June 28), the highest figure since records began in 1990, the USDA data showed.

 

The shortfall reflected the shelving by China of orders totalling 603,700 running bales just three weeks after the country was revealed to have purchased a huge 744,200 bales.

 

That order, which followed the biggest ever so-called exchange for physicals deal in New York futures ever reported, sent prices on a rollercoaster ride in which they soared 25% before losing all that ground and more all within the space of three weeks.

At their peak, futures, boosted by a scramble by investors to cover short positions, gained a premium to the Cotlook A index of physical prices for what is believed to be a first time.

 

The Cotlook A, which factors in shipping costs, usually has the premium.

 

The huge Chinese cancellation was, ostensibly, a severe negative factor for prices.

 

"It is never bullish when China, your biggest customer, cancels cotton," Keith Brown, at Georgia-based brokerage Keith Brown & Co, said.

 

There was no evidence from today's numbers of the order being transferred to the 2012-13 season, which starts in August, he said.

 

The USDA report showed net sales totalling 87,070 running bales of new crop cotton.

 

However, prices held relatively firm amid suspicions that the huge order, and cancellations, were part of an operation among intermediaries to spark a market spike, a plan which was now completed.

 

"Certainly, the perception of manipulation is there," a leading US cotton broker told Agrimoney.com.

 

The size of the original order so large that it was seen by many traders as near-impossible to fulfil within the two-month deadline, both in terms of collecting supplies and physical transportation and its announcement at a time when speculators had a historically high net short have raised market suspicions.

 

"I have no doubt it was all legal, but it has wrecked this market," veteran trader Mike Stevens said, noting that many investors and physical traders will have lost money through the spike.

 

Cotton for December closed 2.3% higher at 69.51 cents a pound in New York, where the thinly-traded July lot finished 3.4% higher at 70.30 cents a pound.