How will ZCE cotton futures market fare?

During the seven-day Spring Festival holiday, there were 308 million domestic tourist visits, up 23.1 percent year-on-year, recovering to 88.6 percent of the 2019 level, and there was no large-scaled virus infection for the second time, so market sentiment was optimistic after the holiday, waiting for the demand recovery in China. But from Feb 2, ZCE cotton futures started to fall down, returning back to the level on the last trading day before the holiday, but the daily K-line was still above 20 days moving average. ZCE major cotton contract has risen from 12,270yuan/mt in end Oct 2022 to a high of 15,275yuan/mt after the holiday, an increase of 3,005yuan/mt or 24.5%. The rise was mainly driven by the expectation, and the decline in recent days was mainly about the suspension of expectation. Later, whether the market will go up further or fall down, some factors shall be concerned.

The primary expectation factor: US Fed’s hike on interest rate and US dollar index change. As US Fed began to raise interest rates several times from Jun 2022, and the US CPI declined from Aug 2022, the funds have started to trade ahead of the Fed to slow down or cut interest rates. The dollar index fell in Nov 2022 to early Feb 2023. ZCE major cotton contract rose steadily step by step during this period. However, on the night of Feb 3, US Bureau of Labor Statistics revealed that the Nonfarm Payrolls rose by 517,000 in Jan, which came in much higher than the market expectation of 185,000, and US dollar index rose for three days, leading to lower commodity market, including ZCE cotton futures. We are not good at judging the late dollar index and the Fed’s action on interest rates, so a simple market description is made here.

Another expectation factor is the quick shift of China’s epidemic policy, leading to the expectation on Chinese demand recovery. In Nov 2022, there was news in circulation about the shift of China’s epidemic policy, and in end Dec, the epidemic ended the peak quickly. The funds traded the Chinese demand recovery expectation in Nov and Dec. In Dec, cotton yarn traders started to purchase, not only reducing the cotton yarn inventory in mills, but also making Southeast Asia increase U.S. cotton purchases as they also purchase yarn from Southeast Asia with RMB appreciation. Then ZCE cotton futures were quite firm and market players paid close attention to the downstream market after the holiday.

Currently, the demand from spinners for cotton is better than that before the holiday. In the first week returning from the holiday, fabric mills and apparel factories purchase cotton yarn and grey fabric, but only for those that are not purchased before the holiday. Therefore, downstream demand is tolerable, but mainly from inventory replenishment, just buyers shift from traders to fabric mills and apparel factories. Demand has not improved much and market players still wait for the further reflection from end-user consumption. In the second week after the holiday, cotton yarn price rise starts to meet resistance.

In general, cotton prices are mainly dominated by macro environment from Nov 2022. The main positive factors to cotton prices later are: 1. The Chinese macro policy may continue to give positive stimulus to cotton market in the first quarter, giving loose monetary policy; 2. With historical low cotton/grain price ratio, 2023/24 cotton planting areas may reduce; 3. Spinners still have certain demand for cotton. With coming new cotton planting period, cotton prices may be hard to slip sharply. The uncertain factor at present is mainly the end-user consumption. If it is good later, replenishment will continue, but if it is poor, supply pressure will increase. The market still waits for a more clear direction from new cotton planting, end-user consumption and macro news.