Market Analysis: Cotton Prices Are Arbitrage "High Inside And Low Outside"

 

What is the current situation of cotton supply and demand at home and abroad?

In this year, the global cotton supply exceeded demand. The expected global cotton output in 2022/23 is 25.33 million tons, the expected global cotton consumption is 23.87 million tons, and the output exceeds the consumption by 1.46 million tons. The supply side is under great pressure. The global cotton import volume is expected to be 8.25 million tons, which also has a significant year-on-year decline.

In 2022/23, the overall domestic cotton supply will exceed demand. Among them, the cotton output in Xinjiang has reached the highest level in history. According to the estimation of the processed cotton in Xinjiang, the cotton output in 2022/23 is estimated to be 6.24 million tons, an increase of about 900000 tons over the previous year. Consumption is affected by the epidemic, and the entire industrial chain shows a pattern of active de stocking. The cotton import volume in that year is estimated to be less than 1.4 million tons, 300000 tons less than last year.

At present, the peak of domestic cotton supply has passed, and the cotton commercial inventory has entered the decline channel. According to the seasonal law, the cotton commercial inventory will continue to decline, reaching the lowest value in the year in September. On the demand side, domestic cotton is expected to be stronger than the reality for a long time, and it still needs some time to improve the demand. In terms of import and export, the cotton import volume has been maintained at a low level so far this year. The textile and clothing export data in March and April improved more than expected, but the sustainability of the improvement of export data is expected to be weak.

According to relevant data, as of the end of March, the commercial inventory of cotton in China was 5.07 million tons, the highest in the same period in recent years. With the reversal of the price difference of cotton at home and abroad, imported cotton has become attractive in terms of price. As of last week, the price difference between domestic 328 cotton price index and imported cotton price index under 1% tariff was 750 yuan/ton; The price difference with the imported cotton price index under sliding allowance tax is 600 yuan/ton.

The supply of domestic cotton and imported cotton is very sufficient. At present, the inventory of domestic cotton industry is close to 700000 tons, and the demand for downstream replenishment is slowing down; And with the rise of Zheng Mian and the arrival of seasonal consumption off-season, the enthusiasm of downstream replenishment has further declined.

In 2023/24, the domestic cotton balance sheet is expected to show an overall de stocking pattern. The overall pattern shows a decline in output and a weak recovery in consumption. Compared with 2022/23, the supply and demand balance sheet has a detailed improvement, in which the details of expected output are reduced, and consumption is flat or slightly increased. Regardless of the national reserve rotation policy, the marketable inventory will decline. Cotton imports are expected to increase slightly.

How about the planting area this year?

According to the China Cotton Association, it is estimated that the new cotton planting area in China this year will be 41.489 million mu, down 7.8% year on year, including 37.25 million mu in Xinjiang, down 1.6% year on year. The decline of new cotton planting area in this year has become a foregone conclusion. The most direct impact is the decline of new cotton output. It is estimated that the new cotton output in China will decline by at least 10% to less than 6 million tons in 2023/24, and the pressure on the cotton supply side will be greatly relieved.

At present, most of Xinjiang's production reduction expectations have been traded in the market, but the specific impact of bad weather on production needs to be determined after field research in Xinjiang. If it is proved that the impact of weather is not so great, the market will have poor main trading expectations. Of course, if the weather performance continues to be poor in the future, the market will continue to trade the variable of weather.

At present, the market also pays attention to downstream consumption. Since the Qingming Festival, the downstream cotton textile market should theoretically enter the traditional off-season. However, the demand for hotel linen in the downstream home textile category is better this year, which is more reflected in the light season. Spinning mills maintain a high operating rate and low inventory level, which also supports the market to further increase prices. With the downstream orders coming to an end, the demand factor may become a factor restraining the rise of cotton prices, which also needs attention.

For the future market of cotton, the supply and demand situation of cotton in this year has been very clear, the story of this year has basically ended, and the current market transactions are expected for cotton in the new year. Cotton entered the stage of oscillation adjustment. The USDA report in May last weekend was optimistic about the outlook for 2023/24, and the main contract of Zheng Mian stopped falling. In the USDA report, it is estimated that the global cotton output in 2023/24 will be basically flat on a year-on-year basis, but China's cotton output will decline significantly on a year-on-year basis; The global cotton domestic consumption and import and export demand increased significantly year on year, and China's cotton consumption is also expected to improve strongly. In the long run, China's cotton fundamentals have shown a pattern of declining supply and improving demand, with strong price support for Zheng cotton and a long-term bullish view of Zheng cotton. However, it should be noted that from the recent domestic economic data, the bottom support for the current consumption improvement is weak, and the improvement of demand may take a long time.

This year, the cotton market as a whole is defined as oscillating, but the bottom is rising, but it is still some distance from the expected peak. The main contradiction of the cotton market in the future depends on whether the factors supporting the rise of cotton prices dominate or the factors restraining the rise of cotton prices dominate. At present, the first factor to curb the rise of cotton prices has emerged, which is the arbitrage power of buying outside and throwing inside. Due to the continuous rise of domestic cotton prices, the current internal and external margin has shifted from "low inside and high outside" to "high inside and low outside". This kind of price difference between domestic and foreign cotton supports more foreign cotton and cotton yarn to come to China in the future, which will have a certain inhibitory effect on domestic cotton prices.

The decrease of cotton planting area this year has a greater impact on the cotton output forecast. According to the latest US Agriculture Report, China's cotton output in 2023/24 is estimated to be 27.5 million bales, down 3.2 million bales year on year. The overall supply and demand are tighter than this year, and the shift of cotton price center is a high probability event.