Cotton yarn sliding more surrounded by the bearish market

ZCE cotton futures nosedived recently and broke through the threshold of 20,000yuan/mt, which triggered the decline of cotton yarn in addition to weak downstream market.

Cotton yarn price stayed relatively firm in May, but cotton price fell evidently, as cotton yarn sales turned better in May than that in Apr, and cotton yarn mills were reluctant to lower prices under great losses. However, it was seen to drop intensively in the first half of May. The market moved into slack season from Jun and downstream demand faltered accordingly. Furthermore, the continuous weakness of cotton slowed down the procurement of downstream weavers and traders, and cotton yarn inventory accumulated again. On the other hand, under the fall of cotton price, the profit of cotton yarn mills improved. Some varieties could achieved breakeven and the mills in Xinjiang also turned profitable. As a result, cotton yarn mills were more willing to destock amid pessimistic market sentiment.

Among cotton yarn, open-end one stood out, and lower-count ones dropped less than high-count ones. Firstly, as raw materials of open-end cotton yarn, combed noil price increased over 2,000yuan/mt cumulatively, but open-end cotton yarn rose less due to soft downstream demand. Secondly, the supply of imported cotton yarn which was mainly low-count ones reduced. Since the beginning of 2022, forward imported cotton yarn price was higher than spot one. The very scarce opportunities for placing orders reduced available spot cargos in China market gradually, so traders and downstream weavers switched to operate Chinese low-count cotton yarn. Thirdly, the restriction on Xinjiang cotton hindered the export of China increasingly. US customs will start to launch gene detection from Jun 21. European Parliament approved the resolution on Xinjiang on Jun 9 and required the ban on Xinjiang-origin products. Europe and the US are major export destination of Chinese textile and apparel, so these actions hit the export of Chinese cotton products greatly, which also plays a significant role of stagnated sales of high-end or high-count products. At present, price spread of cotton yarn containing imported cotton and that made of Xinjiang cotton has widened to around 2,000yuan/mt, which was 1,500yuan/mt in the past years.  

Nevertheless, cotton products also perform badly in China local market.

In terms of retail sales, monthly retail sales of apparel, shoes, hat and knitted products performed worse on the year than that of social consumer goods. It decreased over 10% on the year in Mar-May, with over 20% in Apr, and 8.1% cumulatively in Jan-May. Currently, the government has introduced a series of incentives to stimulate domestic demand and later consumption may improve, but it still takes some time for local market to recover all around.

In short term, the demand is not expected to turn much better in traditional slack season in Jun-Jul. There are many uncertainties in the second half year which depends on China macro economy situation and the export situation under restriction on Xinjiang cotton. On the other hand, it is close to the end of cotton crop year, but the ginners still hold a large amount of cotton stocks in hand and they are also burdened with loan payment, so cotton market is likely to weaken, and accordingly, cotton yarn price will further fall back.