ZCE cotton runs moderately with no strong impetus from fundamental

From late September to early October, ZCE cotton futures market once reached a high of 14,755yuan/mt driven by macro factors, and later, it fluctuated narrowly from October 9 to early December, with the major contract running between 13,850 and 14,250yuan/mt. In early December, ZCE cotton showed signs of shifting downward, as market expectations for the macro "meeting" cooled, domestic new cotton production exceeded expectations leading to significant supply pressure, and the anticipated downstream replenishment ahead of the Spring Festival was delayed. On December 9, ZCE major cotton contract fell below the significant support level around 13,800yuan/mt, reaching a low of about 13,690yuan/mt, although the overall drop was not deep. Additionally, there were many domestic macro meetings in December, and expectations for policy stimulus had not disappeared, which prevented further declines in ZCE cotton. So, what are the expectations for the future market?

From the current performance of downstream spinning mills, operating rate of spinning mills continues to reduce and product inventory still accumulates. From December 6 to 9, the market began to report that some large fabric dealers in Guangdong have replenished stocks, but the overall market performance was average. Meanwhile, some plants lacked confidence and indicated that their feedstock replenishment would not be large. In addition, some fabric mills intended to start holidays in end December. Therefore, the demand for pre-Spring Festival stocking from the downstream industry remains uncertain, and marginal driving forces are currently weak. However, looking at recent years, there has been marginal replenishment in late December, and compared to the same period in 2023, downstream operating rate and inventory levels are better. Thus, there is still some support for cotton prices.

However, the supply pressure is relatively greater this year. As of December 11, 2024, The ginning volumes of Xinjiang cotton have reached 5.037 million tons, an increase of 800,000 tons year-on-year. The unexpectedly high production of domestic new cotton has also brought more supply pressure. Currently, the social liquidity inventory of cotton in China is at its highest level in nearly three years. This supply pressure indicates that the upward pressure on ZCE cotton remains strong. Additionally, there is still a significant amount of new cotton in both southern and northern Xinjiang that has not been hedged, making the pressure more pronounced.

Overall, there are many macroeconomic meetings in December, and expectations for policy stimulus still exist. Historically, from late December, downstream industries tend to increase marginal inventory, so whether the downstream demand remains weak in the short to medium term cannot be definitively concluded. However, the high new cotton production and potential hedging pressure on new cotton put pressure on cotton prices. Even with favorable macroeconomic conditions, it may still be difficult for cotton prices to break through this pressure in the short to medium term. Meanwhile, the December USDA monthly supply and demand report has raised India's cotton production forecast, so attention should be paid to whether the supply pressure in the overseas market increases marginally in the future. If foreign cotton supply pressure increases, it would also negatively impact domestic cotton.