Business

Chinese Cotton Price Expected To Rise In Q2, 2017

Zhengzhou cotton futures market continued to decrease from last week and began to dive on December 19. The most active contract, May contract, has slumped to 14,905yuan/mt on December 20, down nearly 840 yuan/mt in the first two days of this week.

From the technical analysis, MACD (Moving Average Convergence-Divergence) and KDJ indicators showed signs of adjustment. From the fundamental analysis, cotton futures were affected significantly by the commodity market with the retreat of capital.

Moreover, the physical market remained weak. On one hand, the downstream yarn and grey fabric market remained lackluster. Spinning mills' operating rate decreased slowly and cotton inventory in mills also declined.

Grey fabric plants also cut operating rate to face the dull sales. On the other hand, the ginning volumes of new cotton in Xinjiang have exceeded 3.60 million tons, so the total output may reach 4 million tons, much higher than market anticipation, weighing on the market.

Market outlook

In short term, viewed from the daily k-line, the market is likely to shiver around 14,800-15,000 yuan/mt. Later, if the market continues to decrease, it may dive to 14,500yuan/mt. For the medium-to-long-term logic, we estimate that the market is relatively positive in the second quarter of 2017.

Firstly, for commodity market, the bullish sentiment has not ended and the capital has not retreated totally. In the second quarter, with the coming peak season, speculative buying may appear again, shoring up the cotton futures. Secondly, looking from the policy, with the supply-side reform, planted areas of cotton is not likely to increase largely. The government has announced to start state cotton reserves sales from March 6, 2017.

The possibility to sell large quantity of reserved cotton to dampen the prices is very limited, as the price decline will affect the sales of reserved cotton.

Under the de-stocking strategy, it is not likely to sell reserved cotton on large quantity. Thirdly, the downstream sectors are predicted to be not poor in the second quarter. The state cotton reserves sales will start in March 2017 and the floor bidding price of reserved cotton will continue to be set based on the average price of domestic and international cotton price. So, the production costs of cotton yarn may reduce with the reserved cotton like the situation in 2016, which is favorable for domestic mills.

In general, after the start of state cotton reserves sales in 2017, the Chinese cotton price is expected to rise. However, there is also risk if the reserved cotton is sold with large quantity.

Once the domestic and international cotton prices soar obviously during a period and more than 70% of reserved cotton is sold per day for three days within one week, the daily selling volumes can be added.

Then, prices are likely to shiver in broad range. But the market is still under the supply-side reform policy. So we expect Chinese cotton prices at 15,000-18,500 yuan/mt in the second quarter of 2017.