Cotton prices slump amid macroeconomic panic, early to hit the bottom?

Recently, macroeconomic disturbances have been frequent. After entering Jul and Aug, the US Dollar Index has weakened, while the USD/RMB exchange rate has dipped rapidly. Many macroeconomic data anomalies indicate that market trading has become more intense regarding macro factors. Although the market had already started trading on macro factors in Apr and May this year, the release of US non-farm payroll data in early Aug, which fell far short of expectations, has made the market's expectation of a Federal Reserve rate cut in Sep more certain. On Aug 5, concerns about a US recession increased, leading to a global stock market sell-off, with the Nikkei index experiencing a drop of over 12%. Under the macroeconomic panic, the ZCE cotton, which already had a weak fundamental outlook, further declined. On Aug 5, the ZCE major cotton contract fell below the support level of 14,000yuan/mt, and on Aug 6, it continued to decline, below 13,800yuan/mt.

From the market performance perspective, macroeconomic risks have just entered the most intense trading phase. We still need to pay attention to macroeconomic disturbances in the future. Once macroeconomic trading comes to an end, the proportion of trading based on fundamental factors will increase.

Regarding the industrial fundamentals, the global cotton market supply is still forecast to be larger than demand. The increase in supply is mainly concentrated in overseas markets such as US cotton, Brazilian cotton, and Australian cotton. Chinese production has increased but the growth can still be absorbed. However, some risks related to old crops on the supply side have not yet been cleared. For new crops, market expectations for prices are weak, and there is still pressure to go up. On the demand side, after entering Aug, the market gradually enters the traditional peak season for downstream industries. The market is paying more attention to the marginal improvement in downstream conditions. In early Aug, some local markets, such as Lanxi, saw a month-on-month improvement in orders from some enterprises. However, in some markets like Guangdong, some enterprises reported that large enterprises' stockpiling has already entered the final stage, and small enterprises have not yet started stockpiling. Comparing with the similar situation of spinning and weaving mills in 2022, there was indeed a noticeable improvement in downstream operations by the end of Aug 2022. Orders for weaving mills also increased in late Aug to early Sept in 2022 and 2023. Therefore, whether the downstream orders improve in Aug and Sep has become one of the main factors of market concern. Nevertheless, regardless of whether there is marginal improvement or not, the market's expectations for the strength of the improvement are currently low. Thus, the expectation for cotton prices is not limited to demand alone but also needs to consider other factors such as the macroeconomic environment.

In terms of downstream profits, the lower cotton prices lead to the profits recover gradually. Though the spinners in inland have not seen the full recovery of profits, the cash flow turns positive gradually. But under the low operating rate of spinning mills, it may need better profits and longer time for recovery in downstream market.

In summary, after entering late Jul and Aug, market trading related to macroeconomic factors has become more intense. The US non-farm payroll data released in early Aug falls far short of expectations, further increasing concerns about a US recession. This macroeconomic panic has driven down cotton prices. In the medium term, macroeconomic trading has not yet concluded, and cotton prices still do not have a clear bottom. Once the macroeconomic risks come to an end, the impact of industrial fundamentals on cotton prices will be able to increase.