What is the fundamental situation of ZCE cotton futures market?

After the macroeconomic policy stimulus at the end of Sep, ZCE cotton futures market has often shown similar daily trends to the Shanghai Composite Index. The favorable policies before the holiday led to a rapid rise in ZCE cotton, but after the holiday, some profit-taking and hedging activities caused ZCE cotton to open high but then decrease on Oct 8, similar to the Shanghai Composite Index. Then, aside from the macroeconomic factors, what is the current fundamental situation of ZCE cotton?

1. Seed cotton prices rise first and then decline following the trend of ZCE cotton

Before the National Day holiday, the price of seed cotton rose steadily, primarily based on the increase of ZCE cotton. Ginning factories in Xinjiang were cautious to purchase overall, aiming to hedge in real-time. Nevertheless, during the National Day period, ZCE cotton was not open for trading, yet the market sentiment for the macroeconomic outlook after the holiday remained positive. This resulted in the purchasing price of seed cotton continuing to rise steadily during the holiday. As of Oct 7, the main purchasing price for machine-picked seed cotton with ginning yield of 40% was around 6.4-6.5yuan/kg, highly at around 6.6-6.7yuan/kg. In contrast, prices were lowly at around 6.2-6.3yuan/kg in South Xinjiang. This led to a situation on Oct 8, when ZCE cotton opened higher but then trended downward, with only a small quantity of newly harvested cotton from South Xinjiang available for hedging, while the higher purchasing prices for North Xinjiang cotton showed a slight backwardation relative to the market. After ZCE cotton dropped, the price of Xinjiang seed cotton fell in line with ZCE cotton over the next three working days. As of now, the lower purchasing prices for machine-picked seed cotton with ginning yield of 40% were around 5.9-6.1yuan/kg (South Xinjiang), although the prices for available purchases still mostly remained at 6.2-6.3yuan/kg and above, with some still maintaining higher purchasing prices of 6.4-6.45yuan/kg.

Currently, the purchasing progress for North Xinjiang seed cotton is still below 50%, while the purchase of machine-picked seed cotton in South Xinjiang has only just begun. Therefore, the proportion of high-cost cotton is low. If future purchasing prices for machine-picked seed cotton can be controlled below 6.3yuan/kg (ginning yield of 37%), with cottonseed prices around 2.05 yuan/kg, the new cotton costs are below 15,000yuan/mt on theory. From a cost perspective, if ZCE cotton maintains at 14,500yuan/mt or above, it will gradually face hedging pressure.

2. New cotton supply will increase gradually

Currently, there is still not much new cotton available in the spot market, but a small number of quotes have emerged. For the 2024/25 season, the basis for hand-picked cotton from South Xinjiang and machine-picked cotton from North Xinjiang, 29mm and 29gpt, is currently at 800yuan/mt and above on ZCE Jan contract, partly at 1,000yuan/mt for cotton from XPCC, ex-Xinjiang. The supply of new cotton may gradually increase by the end of Oct, with some previously sold cotton also scheduled for delivery at that time. Once the supply of new cotton increases, the short-term issue of insufficient high-quality cotton supply in the market may be alleviated, and the overall market supply is expected to be relatively ample in the short term.

3. Uncertain downstream demand

Downstream demand has seen improvement again in end Sep, especially after the large rise of ZCE cotton, some spinners that sit on the sidelines before start to purchase and there is also some speculative demand. Cotton yarn inventory reduces. Nevertheless, after the holidays, ZCE cotton declines and the wait-and-see sentiment increases again. Operating rate of fabric mills in some markets, like in Guangdong, reduces somewhat. But operating rate of spinning mills keeps up as yarn inventory reduces and the weakness is not obvious. Therefore, downstream market situation is not very bad currently.

In summary, the current macroeconomic impact remains unclear. From a fundamental perspective, if the purchasing price for machine-picked seed cotton can be kept within 6.3yuan/kg (ginning yield of 37%), and assuming cottonseed prices are around 2.05yuan/kg, the cost of new cotton would be below 15,000yuan/kg. From a cost perspective, ZCE cotton futures above 14,500yuan/mt will gradually face hedging pressure. Additionally, the supply of new cotton in the spot market will gradually increase by the end of Oct, resulting in a relatively ample overall market supply in the short term. Therefore, without any significant positive macroeconomic factors, ZCE cotton is expected to experience downward pressure. However, if macro policies provide substantial positive support again, seed cotton prices may easily rise once more.