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Weekly: ICE Cotton holds up gains on short covering; December contract expiry next week

3 Dec 2022 4:58 pm
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Mumbai, 3 DEC (Commoditiescontrol): ICE cotton futures have managed to regain lost ground during the week to Dec 2nd, natural fibre witnessed three session back-to-back winning streak, as speculators rushed to cover their position ahead of December contract expiry next Wednesday.

Cotton prices closed Friday's session lower, weighed down by an uptick in the dollar and weakness in the U.S. stock market. After looking very strong in early trading Thursday, cotton caved lower. Once it became apparent that movement above 87.35-cent would be difficult, traders began selling in droves.

On Friday, the most-active cotton contract for December closed at 84.28 cents, down 1.65 cents, March 2023 finished at 83.20 cents, down 1.65 cents and July 2023 settled at 81.99 cents, 1.38 cents lower; estimated volume was 20,035 contracts. The March contract is up about 4.4% so far this week.

Spot December cotton remains in its delivery period. Last week saw a total of five notices tendered, but there were none for Monday. Delivery runs through Dec. 7, the expiration date for the contract. There are only 703 lots remaining unsettled as of now.

Interestingly, the December contract managed to hold a small inversion over March, signaling that the US situation remains tight at this point, which is also reflected by the firm basis.

For the entire week, Cotton held up nicely, helped by the combination of positive news on interest rate hikes, which may see some moderation. Indication of slower pace of rate hike was provided by Federal Reserve Chairman Jerome Powell in a speech.

The trade events at Las Vegas (ICA Dinner) and Miami (Cotton Summit) offered little material to feel excited about cotton trade. The industry summit suggested slow paced mill demand would continue for some time.

Most mills around the globe have been running 20 to 50% below their usual pace for the last 4-5 months, and while some are hopeful that things might improve in January, this is more hope than reality at this juncture. Many mills are sitting on 2-3 times their normal yarn and fabric inventories, as consumer demand remains subdued, which weighs on the entire supply chain.

Comfortable levels of inventories and slow pace of cloth demand points towards adequate availability of cotton. Consumers will have to start buying more cotton products for things to improve, but many of them have bought so much during the lockdown that they have no appetite to add more home textiles, towels and apparel at this point. Instead they spend money on inflated living expenses, like food, shelter, gas and utilities, and if there is money left over, they prefer to spend it on experiences, such as travel and eating out. It doesn’t mean that they won’t buy cotton products at all, but if they absorb let’s say 10-15% less than usual, it would lower mill use by 12-18 million bales.

As regards the U.S. cotton harvest, the season is nearing its end at 84% complete as of last Sunday, 5% faster than normal per the final Crop Progress report of 2022.

U.S. Department of Agriculture's weekly export sales report on Thursday showed net sales of 16,500 running bales (RB) of cotton for 2022/2023, after reductions of 116,400 RB last week. This week export sales were pretty dismal, as combined crop years sales total slightly above 27,000 bales. However, last week's take was a net negative number. Still, this week's positive activity was the lowest since July, traders said.

Making U.S. cotton more expensive for holders of other currencies, the dollar rose 0.5% against its rivals.

Shipments were reported at 139,500 RB. Thus far in the MY, 8.701 million RB has been sold or shipped, which is 74% of the USDA forecast, compared to the normal 70% pace. Commitments are losing the large lead they had on the average pace with the lack of sales.

The WASDE doesn’t reflect the right numbers yet and we should therefore expect a sizable downward revision in mill use over the coming months, which is bearish. The USDA has mill use still at 115 million bales, while Cotlook is at 108 million bales and the reality might even be lower than that. Unless we see either financial markets rally, the dollar weaken or consumer confidence rebound, it will be challenging for cotton to move much higher. Instead it becomes a question of how much lower we might have to go to uncover greater demand.

Weekly CFTC data reflecting positions as of the Nov 29 settlement, showed managed money cotton traders held 14,913 contracts net long. That was a 2,366 contract lighter net long on weak driven by new selling. Commercial cotton hedgers reduced their net short by 3,022 contracts through the week to 36,503.

The CFTC spec/hedge report for the week of November 9-15, during which March moved sideways between 82.57 and 87.62 cents, showed a similar trend as the week before, with specs covering some shorts and adding new longs, while the trade liquidated a large amount of longs and shorts.

Speculators bought 0.36 million bales to reduce their net short to 1.1 million bales, while index funds were also net buyers, increasing their long by 0.29 to 7.17 million bales. The trade took the other side, selling 0.65 million bales to increase its net short to 6.06 million bales.

The recent rally was mainly caused by spec short-covering, after they had sold themselves into a “bear trap” as we headed towards convergence between cash and futures in the December delivery period. While speculators might eventually have to cover more shorts, the fact that December is now liquidated buys them another 3 months before they face the next reality check with the cash market. In other words, there is no urgent pressure for these spec shorts to get out.

The weekly Cotton Market Review showed 10,715 bales were sold at spot during the week that ended Dec 1. USDA had the week’s average selling price at 80.81 cents. The Cotlook A Index 380 points higher on Dec 1 to $1.02 90/100. The FSA updated AWP for the week is 73.03 cents/lb, down by 158 points.

Lack of demand remains a major cause of worry for cotton trade. There exists disagreement between demand and supply, which currently holds favour with the bear camp.

However, while demand is lousy and mills are not buying much at the moment, we are also seeing a refusal by growers to sell at these low levels, and the strong US basis reflects this. In other words, we have a standoff between buyers and sellers, with neither side willing to yield at the moment. This is keeping the market from making a big move to either side.

Sooner or later this stalemate will be broken and unless demand improves considerably over the coming months, it is feared that the growers would end up holding the short end of the stick. It could still take a while before supply pressure forces their hand, but it seems inevitable in the current environment.

For Monday, support for December Cotton contract is at 81.80 cents and 80.40 cents, with resistance at 85.20 cents and 87.20 cents.

(By Commoditiescontrol Bureau: +91-22-40015505)

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