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Weekly: ICE Cotton Ends Lower On Mounting U.S. China Rift; Analysts Eye 60+ Cents Target In Near Term

24 May 2020 7:22 pm
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Mumbai (Commodities Control) – After much zig-zag owing to China demand concerns, firm crude oil and continued short covering, ICE July cotton lost 64 points for the week ended 22nd May. The contract had gained 198 points the prior week.

Despite a negative closing, though, July futures posted four consecutive new highs this week. However, prices began to turn south after peaking at 59.85 cents.

Cotton#2 fell over 1% on Friday as an escalation in U.S.-China tensions cast doubts over demand for the natural fiber. Cotton contracts for July fell 45 points at 57.61 cents per lb. October Cotton closed at 57.51, down 86 points. The spread for July-October has squeezed to inverted 10 from inverted 125 points last week.

President Donald Trump's rhetoric against China's plan for a national security law in Hong Kong on Thursday raised concerns over Washington and Beijing reneging on their phase-1 trade deal.

A protracted trade rift between the two economies has raised concerns among investors over demand as the U.S. is the biggest exporter of cotton, while China is its biggest consumer.

According to CFTC data for the week ended 19th May, managed money continued to cut their net short position for 4th straight week at 9684 contracts down from 15,048 contracts from the week ended 12th May.

Meanwhile, open interest upped 1487 contracts at 231,995 contracts.

On Monday, the fibre reacted to the souring U.S-China ties. After an initial early session price rise helped by rising crude oil and a surging Dow Jones, cotton gave up all its strength to the unraveling of the U.S.-China relationship over COVID-19. Cotton contracts for July fell 45 points at 57.80 cents per lb.

Meanwhile USDA’s Crop Progress report after showed cotton planting had progressed 12 percent to 44% complete on May 17. The 5-yr average is 40% planted.

On Tuesday, however, ICE cotton futures rose to their highest in more than two months on hopes of a pick-up in demand as economies ease coronavirus-led restrictions and as unfavorable weather in top growing areas in the United States posed a threat to crops. Cotton contracts for July rose 140 points at 59.20 cents per lb.

But with sharp price rally came the profit booking. ICE cotton futures fell more than 1% on Wednesday as farmers rushed to sell excess stocks in a bid to lock in prices given the uncertainty over future demand, especially from China. Cotton contracts for July fell 0.87 cent, or 1.5%, at 58.33 cents per lb

Even on Thursday, the fibre continued to be depressed as trade tensions between the United States and China mounted.

The United States Department of Agriculture's weekly export sales report showed net sales of 128,900 running bales for 2019/2020 were down 46% from the previous week and 51% from the prior 4-week average.

The sales were split 128,898 RBs old crop and 120,214 RBs of 2020/21 cotton. Of the week’s sales, Bangladesh (-16,300 RBs) Thailand (-11,900 RBs), and others had canceled sales, while China had increased purchased to 157,299 RBs.

However, the weekly export sales data confirmed higher purchases from China for the week ending May 14.

Lockdowns and disruption in economic activities due to the global coronavirus pandemic have led the contract to fall nearly 17% so far this year.

Meanwhile the initial U.S. Department of Agriculture (USDA) cotton projections for 2020/21 (August-July) includes a closer balance between global cotton production and use than in 2019/20.

Even so, ending stocks in 2020/21 are forecast to increase to their highest in 6 years. World cotton mill use is forecast to begin its rebound from the COVID-19 disruptions that have affected the global cotton supply chain from spinning to retail.

For 2020/21, cotton mill use is projected at 116.5 million bales, 11 percent above the 2019/20 estimate that has seen significant reductions for many countries. In 2020/21, cotton use in most of these countries is expected to rebound, with China, India, and Pakistan leading the increase.

Planting progress and weather reports continue to increase in importance as traders begin forming opinions of the 2020 crop. As always, the Export Sales Report will play a central role too. Beyond these points, it seems likely that news headlines and outside market performance will provide day-to-day variations in the market.

In India, meanwhile, Cotton Corporation of India (CCI) has made record purchases of 92 Lakh bales this year across the nation. Infact CCI has become only the single agency in the world to undertake largest cotton procurement, in the World, so far.

In value terms, CCI’s cotton procurement is worth record 25,000 Crores. The agency has procured cotton at MSP of around Rs 5255-5550/Quintal, much higher than the market price, directly from farmers.

Technical analysts note that after bottoming under the 50-cent mark on April 1, the market has rallied over 10 cents. The market has developed a well-defined trend up-channel, which is encouraging traders to buy on breaks.

Experts believe, if that chart formation stays true, it projects a likely upside target of 60.50 cents, which is a 50% retracement from the January high down to the April low.

However experts advise to tread carefully as the global supply overhang continues to be massive to construct a bullish case and the fibre may (hopefully) stick to a trading range in the 50s. But if retail demand doesn’t get back on track, then new lows are not out of the question.

(Commodities Control Bureau)

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