Spinners replenish large quantity of cotton during the decline of ZCE cotton

Zhengzhou cotton futures market has slipped for two consecutive weeks from Mar 2, affected by high U.S. treasury yield, rising US dollar index and tightening liquidity in China. The May contract, the major contract, once declined to 15,330yuan/mt on Mar 10, a fall of 1,750yuan/mt compared with the high within this year. During the decline period, spinning mills have procured much cotton. By Mar 12, cotton inventory in spinning mills is assessed at 45.4 days, up 4.4 days from Mar 1, according to CCFGroup.

The decline of cotton futures in recent two weeks was mainly affected by the macro environment, not much related with the fundamentals. On Mar 4-5, the U.S. treasury yield climbed up again, and there were rumors that the state cotton auction might be implemented in May, and there were concerns about the auction of reserved imported cotton. On Mar 10, the decline was not only impacted by the unfavorable stock and commodity markets in China, but also by the slump of ICE cotton futures. On Mar 9, ICE cotton futures market reached the down limit despite of the favorable USDA Mar supply and demand report, but plummeted by the profit-taking of longs and the speculative selling. On Mar 10, the major contract of ZCE cotton once slumped to 15,330yuan/mt.

Currently, many spinning mills still have orders at hand, and orders in some large mills can be filled till Apr-May. Cotton inventory in spinning mills is low overall. Therefore, during the sharp fall of ZCE cotton futures on Mar 4, Mar 5 and Mar 10, the purchasing volumes were relatively large. By Mar 12, cotton inventory in spinning mills is assessed at 45.4 days, up 4.4 days from Mar 1.

After continuous fall of cotton futures, spinners with limited orders or cotton yarn inventory at hand cut the cotton yarn prices by 200-500yuan/mt. Some higher offers slip by 1500-2000yuan/mt. For spinners with good orders, cotton yarn prices stay flat. After the Chinese Lunar New Year, cotton futures market is volatile, and end-user orders are hard to be concluded.

Currently, the macro environment remains unstable, and market players wait to see the high-level talks between China and the United States on Mar 18-19. In addition, planting season is coming in the major producing countries worldwide, and the field competition between cotton and food crops continues. In the medium to long run, cotton prices may still be easy to rise but hard to decline.