China cotton reserves sales review in Jul-Nov, 2021

On Dec 1, 2021, the China National Cotton Reserve Company announced that the state cotton reserves sales would be suspended from Dec 1, on concern about current cotton market situation. By Nov 30, trading volumes of reserved cotton totaled 1.20 million tons, including 38.4kt of imported cotton, 625.3kt of Xinjiang cotton and 539.5kt of upcountry cotton. The article will review the details about the state cotton reserves sales.

1. Reserved cotton volumes offered for sales and trading volumes

To clearly state the sales condition of reserved cotton, three phases are divided. First, since Jul 5 to end Sep, daily volumes offered for sales maintained steady at 10,000 tons (except the 15,000 tons on Sep 6-Sep 16), and trading sentiment was active, with the volumes fully transacted. Second, on Oct 7, the China National Cotton Reserve Company announced to extend the sales, from Oct 8 to Nov 30. The daily volumes offered for sales increased to 15,000 tons, up to 20,000 tons from Oct 11 and up to 30,000 tons on Oct 19. Trading proportion continued to lower, but the daily trading volumes were basically flat or better than previous period. Last, on Nov 10, the China National Cotton Reserve Company announced to sell 600kt of reserved cotton, and daily volumes offered for sales declined to 20,000 tons, down to 15,000 tons on Nov 25, and down to 10,000 tons from Oct 26 to Nov 30. Trading proportion failed to reach 100%.

2. Base selling price and averaged trading price

During the reserved cotton sales, the base selling price has two calculation methods. From Nov 1, 2021, the calculation method of reserved upcountry cotton was adjusted to be related with the international spot cotton price, according to the announcement released by China Reserve Cotton Management Co., Ltd on Oct 30. The base selling price of reserved upcountry cotton this week=the average price of prior week's international cotton price. Other reserved cotton price calculation method remained unchanged, which was set at the average price of international cotton and domestic cotton. The base selling price has certain influence on the trading prices of reserved cotton. From Oct 29 to Nov 4, average trading price of reserved cotton slipped, mainly due to the higher trading volumes of upcountry cotton, while base selling volumes moved up steadily. Later, with the improvement of Xinjiang cotton quality and sales of imported cotton, the average trading prices stepped up. On Nov 25, trading prices rose sharply, and from Nov 26 to Nov 30, the trading prices were also higher than ZCE cotton, which was attributed to the lower volumes of upcountry cotton.

3. Details about reserved Xinjiang cotton, upcountry cotton and imported cotton

In Jul-Oct, the reserved cotton sold was mainly Xinjiang cotton and upcountry cotton, and in Nov, reserved imported cotton started to be sold.

From Jul 5 to Nov 30, total volumes offered for sales were 1.5428 million tons, and the volumes sold were 1.2032 million tons, with a trading proportion of 78%. Xinjiang cotton was basically fully transacted every trading day, while the volumes reduced gradually. Total volumes of reserved Xinjiang cotton offered for sales were 627.8kt, and the traded volumes were 625.3kt, with a trading proportion of 99.6%. In addition, from Nov 15, the reserved Xinjiang cotton sold was from 2019/20 season. Reserved imported cotton was also lured market attention, with the trading proportion maintaining at 100%. Daily volumes offered for sales basically kept at 3,000 tons, and the total trading volumes were 38.4kt. For reserved upcountry cotton, total volumes offered for sales were 539.5kt, with a trading proportion of 61%. From Jul to Sep, downstream demand was relatively good, and trading proportion of upcountry cotton maintained at 100%, but from Oct, the daily volumes offered for sales increased, and quality reduced, so the trading proportion reduced and fluctuated widely, at 5-97%.

From the prospective of average trading prices, the price of reserved Xinjiang cotton moved up first and then weakened slightly overall, which was consistent with the trend of ZCE cotton futures. From Jul 5 to Nov 30, the weighted average trading prices of reserved Xinjiang cotton were 18,074yuan/mt, and calculated 3128 cotton prices were 19,409yuan/mt. The large rise in Oct and Nov was related with the firmer cotton futures, higher spot cotton prices, and the sales of reserved 2019/20 cotton. For reserved imported cotton, the weighted average trading prices were 22,577yuan/mt from Nov 12 to Nov 30, and the calculated 3128 cotton prices were 22,780yuan/mt, which had price edge compared with spot cotton prices. For reserved upcountry cotton, its prices fluctuated limitedly. From Jul 5 to Nov 30, the weighted average trading prices were 17,611yuan/mt and calculated 3128 cotton prices were 19,217yuan/mt. In addition, the price spread between reserved upcountry cotton and Xinjiang cotton maintained flat within 1,000yuan/mt from Jul to Sep, but enlarged since Oct, reaching above 2,000yuan/mt in Nov, highest at 4,741yuan/mt.

4. The participation of spinners and non-spinners

The table shows the purchases from Top 10 spinners and non-spinners from Jul 5 to Nov 30. During the period, 580 enterprises took part in the auction, including 498 spinning mills, with a trading volume of 969.6kt and the weighted average trading prices at 18,259yuan/mt, and 82 non-spinning mills, with a trading volume of 233.6kt and the weighted average trading prices at 17,281yuan/mt.

On Aug 23, CNCRC announced to exclude non-spinners to take part in the state cotton auction, and only spinners could purchase reserved cotton from Aug 24 to the end of this round of state cotton auction. In addition, the reserved cotton can only be used by spinners and cannot be resold. From Jul 5 to Aug 23, non-spinners were the major buyers in the reserves sales.

5. Reserved cotton sales by crop year and region

From Jul 5 to Nov 30, the major reserved cotton sold was the 2013/14 Xinjiang cotton, with a proportion of 45% and volume of 545.2kt, and 2019/20 Xinjiang cotton was also sold later, with a volume of 50.3kt. The reserved upcountry cotton sold was mainly from 2012/13 and 2013/14 season. Shandong origin upcountry cotton from 2013/14 season tool the highest proportion of 7%, with a volume of 84kt, following 2013/14 Hebei and Hubei origin upcountry cotton. For reserved imported cotton, 2020/21 U.S. cotton took the highest proportion, with a volume of 16.7kt, following the 2019/20 Brazilian cotton, with a volume of about 10kt.

6. Length and strength indictors

The high quality reserved cotton volumes were not large during the state reserves sales, and the proportion of reserved cotton with length above 29mm and strength above 29gpt was only 3% or 37kt, and that of reserved cotton with length above 28mm and strength above 28gpt was less than 25% or 282.1kt. Moreover, reserved upcountry cotton accounted for the most, higher than that of reserved Xinjiang and imported cotton. Proportion of reserved cotton with length above 27mm and strength above 27gpt reached about 50%, and the quality was mixed. Reserved imported cotton quality was the best, and the imported cotton with 28mm and 28got above saw prices close to the spot imported cotton price and the 2021/22 cotton on spot market, and other reserved imported cotton had price edge compared with reserved Xinjiang and upcountry cotton.

In general, the trading volumes of reserved cotton reached 1.20 million tons from Jul 5 to Nov 30. By Nov 30, the remaining reserved cotton inventory is assessed at 450kt in state warehouses, including 340kt of 2019/20 Xinjiang cotton.