What are the expectations for ZCE cotton after large decline?

From the evening of April 16, Zhengzhou cotton futures market has experienced a significant decline. The major contract, Sep contract, dropped by over 600yuan/mt from its recent high of 16,515yuan/mt on April 18. The main reasons are as follows:

1. Macro environment: The recent hawkish stance of the US Fed and the diminishing expectations of interest rate cuts have strengthened the US dollar index. Apart from commodities influenced by geopolitical factors, the overall sentiment in most commodity markets was bearish.

2.  ICE cotton delivery receipts have been consistently rising. The previously bullish situation in the international ICE cotton market has shifted to a bearish one, leading to continuous declines in ICE cotton prices under macroeconomic and fund speculation pressures. Prices have fallen back to levels before the bullish pressure, exerting significant downward pressure on Chinese cotton prices.

3. The marginal improvement of downstream market sales in China during late March and mid-April supported ZCE cotton futures previously when ICE cotton declined. However, a weakening trend in downstream industries emerged again in mid-April, leading to a lack of short-term support for Chinese cotton prices. Although the fundamental weakness was not yet very apparent, the sharp decline of ZCE cotton in the short term iwas mainly amplified by macro sentiment.

Looking at the current fundamentals of the Chinese cotton market, cotton prices lack obvious momentum, waiting for the stabilization of macro environment and ICE cotton futures market. The fundamentals are as follows:

1. Production expectations: There is currently no clear adverse weather affecting production, and if early planting encounters unfavorable weather, there is still time for replanting. Therefore, weather conditions have minimal impact in short, but weather effects in the later period still need continuous monitoring.

2. Imports: Massive imports have brought clear supply pressure. Monthly cotton imports have consistently exceeded 200,000 tons from September 2023 to March 2024.In March 2024, the import volumes reached as high as 400,000 tons. From September 2023 to March 2024, imports totaled 2.13 million tons, an increase of 1.27 million tons year on year. Although some imported cotton entered the state reserves, the actual pressure from imports, if the reserves are not released, may not be as significant as it appears. However, commercial imports still impose pressure on the supply side. If cotton prices rise significantly later, the release of state reserved cotton may become a clear policy measure.

3. Cotton inventory: spot cotton inventory pressure is not significant in general and remains at a relatively benign level. In the first half year of 2024, with not bad operating rate of spinning mills and actual consumption, spot cotton inventory is benign. And there are concerns about the periodical inventory tightness if operating rate of spinning mills continues later together with the excessive capacity. However, in the short term, the overall spot supply is still adequate, and the expected inventory tightening has not yet materialized.

4. Downstream consumption: Currently, the performance of downstream sales both domestically and internationally is mediocre. Although overall performance is not bad, there is no significant improvement. Market demand shows slight phase changes. From mid-December 2023 to mid-January 2024, there was an improvement in downstream market, but from February to late March 2024, the increase in new orders was lower than expected, and the peak season was not prosperous. From late March to mid-April 2024, downstream industries saw another improvement compared to the previous period, but from mid-April, the market weakened again. In the short term, the weakening of downstream performance has an adverse impact on cotton prices. However, it is still necessary to observe whether the degree of weakness in consumption is small in the medium term and whether there will be another improvement in downstream performance.

Overall, in the short term, pay attention to the macro environment and ICE cotton futures. Currently, Chinese supply is sufficient, and the marginal weakening of downstream industries has shifted the cotton price fluctuation range downwards. In the medium term, the overall inventory situation is benign, and attention should be paid to whether there will be a temporary improvement in downstream consumption.