ZCE cotton futures slump, upstream and downstream in a stalemate
Zhengzhou cotton futures market declined sharply in recent two days affected by the macro sentiment and weak fundamentals. By Feb 15, the major contract, May contract, once reached 21,240yuan/mt during the night trading session, down 4.4% from the highest of 22,210yuan/mt after returning from the Spring Festival holiday (from Feb 7). The reasons for the decline were mainly affected by the macro factors and the weak industrial fundamentals.
Previously, US Fed reiterated to raise the interest rate by 100 basis points before Jul 1, and US dollars were slightly firm. For ICE cotton, the market has declined somewhat in advance with the USDA’s forecast on a higher U.S. cotton ending stocks and lower U.S. cotton export sales, which dampened the ZCE cotton market as well. Moreover, the oil market was affected by the Ukraine-Russia situation. On Feb 15, with the easing situation, oil prices reduced by over 3%, driving the weaker commodity market. In addition, China regulators warned companies against false price info or drive up iron ore prices recently, driving down the whole commodity market. ZCE cotton futures declined obviously.
Nevertheless, the industrial fundamental was also weak. ICE cotton futures market climbed up obviously during the Spring Festival holiday and downstream players intended to restore the profits, so cotton yarn and grey fabric offers ticked up much after the holiday. Cotton yarn offers rose by 500-1,000yuan/mt, and the spot profits of cotton yarn restored apparently. Currently, spinners face a loss of 1,500yuan/mt, and removing the factors like depreciation, the deficits are less. But though prices move up, actual transactions are bleak. Market players start to concern about the seasonal orders or whether the orders are postponed. However, whether the orders are postponed is uncertain under the weak domestic demand, ban on Xinjiang cotton, gradual disappearance of advantages brought from the epidemic and the outflow of the downstream textile and apparel industry.
Currently, spot cotton sales improve obviously after ZCE cotton futures start to decline on Feb 14. Spinners and traders are active to purchase cotton with lower basis. Nevertheless, the available sources are limited, restraining the trading volumes. With lower cotton futures, some Xinjiang ginners adjust lower the offers, but they are still unwilling to sell overall. Grade-3128 cotton, or better grade cotton, is still offered above 23,000yun/mt, and ginners expect to be sold above 23,200yuan/mt or even above 23,500yuan/mt. Therefore, spinners still have limited sources to purchase, and the market is at a stalemate.
Conclusion: currently, ginners are unwilling to sell, while on spot market, spinners have no large available sources to purchase. In short, the upstream and downstream market may remain at a stalemate. ZCE cotton futures market may fluctuate widely. For long run, large quantity of spot cotton is to be digested, while 2021/22 consumption is expected to reduce overall. For the rest period of 2021/22 season, Chinese cotton prices are likely to go downward, but the downswing may be not smooth as well.
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