Commodity Analysis

Cotton: Watch the China factor

G Chandrashekhar | Updated on May 04, 2014 Published on May 04, 2014

Weather impact El Nino stokes fear SPIRIT OF AMERICA/SHUTTERSTOCK.COM

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Prospects for higher crop in 2014-15, coupled with lower demand, should pressure prices



World cotton prices are up nearly 10 per cent from 85 cents a pound at the start of 2014. Smaller surplus, tighter US ending stocks and China’s voracious appetite for stockpiling have lent firmness to prices. The rally started with lower production, solid demand and tightening ex-China stocks. All major origins reportedly oversold this season, leading to a tight situation for immediate availability.

The industry’s forward cover reportedly remains on the low side, which explains spot price firmness. Worse, weather concerns and looming threat of El Nino that can trigger output loss has attracted speculative capital to the market, driving prices higher. Where will the world market go from here?

World consumption continues to trail production, leading to stock build-up. Mill use is expected to gather pace in 2014-15 thanks to improvement in global economic growth. At the same time, inventory levels are turning burdensome. As the world’s second largest producer, exporter and consumer of cotton, India’s demand has stayed strong on the back of buoyant growth of cotton yarn export to China.

The Government has reintroduced incentives that benefit mills. Weakness of the rupee has provided additional support for the textiles sector. Crop of 35.6 million bales (170 kg each) as estimated by the Ministry of Agriculture for 2013-14 is the highest on record.

El Nino threat

Prospects for higher crop in 2014-15, coupled with lower Chinese demand, should pressure new crop prices. But the big question is what role will the weather play? In addition to the ongoing dry conditions in parts of the world, including Australia, Brazil and South-East Asia, there is the looming threat of an El Nino strike. For India, forecast of below normal south-west monsoon and 60 per cent probable El Nino has the potential to hurt cotton production. Temporal and spatial distribution of rains will impact yields. The USDA’s prospective plantings survey showed a 7 per cent rise in cotton planting intention in the US. If it materialises, the cotton area expansion is likely to end a three-year decline in output. Overall, global cotton area may recover as grains become less attractive.

So, in terms of market outlook, season 2014-15 presents a bearish picture on current reckoning. Opening stocks for the new season will be rather tight and the weather needs to be watched. While high stocks may put pressure on prices, it may be important to realise that China holds as much as 60 per cent of the stocks (estimated at about 11 million tonnes).

To be sure, this cotton is not available to the rest of the world. So, stocks ex-China may be tight and provide some support to prices. At the same time, exporting countries overly dependent on China face the risk of demand compression. Falling polyester prices and rising differential (discount) with cotton prices will also weigh on Chinese import demand in the ensuing season. India needs to watch out.

There could be downward price pressure in the event output stays at or above 32-33 million bales. Growers’ interests need to be protected.

It is widely expected that Cotlook A Index currently at around 93 cents a pound will progressively decline in the second half of the year. The average price for 2014-15 is currently forecast at 88 cents a pound (down from previous year’s average of 90 cents a pound) although the downside’s fragile support means the rates can drop further by 10 per cent.

Published on May 04, 2014

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