Business

Abares Lifts Cotton Price Hopes, Citing 'Significant' Tightening In Supplies

Abares lifted its forecast for cotton prices, although to a level slightly below current values, cautioning over "strong competition" from synthetic fibres for mill demand.

The official Australian commodities bureau raised by 3 cents, to 78 cents a pound, its forecast for world cotton prices, as measured by the Cotlook A index, in 2016-17. The upgrade took the forecast above the 75 cents a pound estimated by the International Cotton Advisory Committee earlier this month. However, the forecast suggests little scope for cotton prices to extend their recovery from spring lows.

Demand vs production

The bureau flagged that world cotton production was expected to fall short of consumption for a third successive season in 2016-17, with year-on-year growth in output undermined by a continued retreat in China's harvest, seen falling by 4% to 4.6 million tonnes.

Abares noted a "8% fall in Chinese planted area to 2.8 million hectares… driven by relatively low cotton prices at the time of planting". The estimate for world inventories at the close of 2016-17 was cut by 500,000 tonnes to 19.1 million tonnes, a drop of 1.9 million tonnes year on year. The bureau noted a "significant decline in the world stocks-to-use ratio for cotton in 2016-17", of 8.7 points to 78.0 points - the stocks-to-use ratio, in indicating the relative demand for supplies, being seen as a price indicator.

Cotton vs polyester

Abares also cited limits to the extent to which cotton prices can recover before tipping notable demand over into rival fibres. "Growth in world cotton consumption is expected to be constrained by forecast increases in cotton prices and strong competition from polyester and other synthetic fibres.

Lower world oil prices in recent years have lowered polyester prices and increased its price competitiveness." In fact, the comments came as oil futures extended their recovery, helped by an agreement by non-Opec producing countries to output cuts, with Brent crude topping $57 a barrel for the first time in 17 months.

'Dips should be well supported'

Abares' revisions contrast with an upgrade by the US Department of Agriculture to its estimate for world cotton stocks at the close of 2016-17, by 184,000 tonnes to 19.41 million tonnes, reflecting increased estimates for US & Australian production.

The US harvest was upgraded by 79,000 tonnes to 3.60 million tonnes, "due to an increase for Texas", the country's top cotton growing state, "which is partially offset by decreases for the Carolinas".