MUMBAI (Commoditiescontrol) - Cotton prices have been bullish; importantly, the global prices have rallied faster with much larger correction. On the last day of February, the ICE cotton (first month futures contract) dipped to 6 ½ -year low at 54.53 cents/lb. Since then it has rallied over 16%.
The Chinese ZCE futures also bottomed out around that time, afterwards, they have rallied nearly 19 percent from 10400 Yuan/tonne. However, Indian cotton spot saw (S6 CAI) the recent lows in the last week of March at 32100 per candy. This was less than 2% higher compared to the seasonal low recorded at the end of October 2016 at 31, 600 per candy. Thus prices have gained by around 7% since its recent lows and little less than 9 percent since the seasonal lows established towards the end of October.
This price movement has narrowed the gap between the global prices and FOB prices from India. At the end of March the Indian FOB prices were quoting more than 7 cents at 64.87 cents /lb over the first month ICE contract. This was highest in recent history for this time of the year. The gap has narrowed since then and now remains around 4.6 cents per pound over the first month ICE. This is much in line with the historical patterns.
It remains to be seen if the export demand emerges due to the reduction in the gap mentioned above or that the global prices crash back to the levels seen earlier in response to the resumption of reserve cotton auctions in China. Already there are reports that most cotton merchants are buying aggressively at current levels.
India has so far exported more than 56 lakh bales till the end of March 2016. Lack of export parity due to the wide gap mentioned above had slowed down the weekly exports to 60-70 thousand bales from the peak exports of 4 lakh bales per week in the month of December 2015. Current rally in the global prices could once again trigger demand for Indian cotton especially from its two neighbors, Pakistan and Bangladesh. While Bangladesh is a regular buyer of Indian cotton, Pakistan has emerged as the second largest buyer filling in the void created by lack of Chinese demand. Cotton crop in Pakistan is said to be down by 35% year on year to around 90 lakh bales of 170 kg each. This is against the USDA estimated consumption of 129 lakh bales. And as a result Pakistan is estimated to have import requirement of 37 lakh bales of cotton. Official data from Pakistan suggests that the nation has imported close to 30 lakh bales of 170 kg each and of these close to 75% is imported from India. Trade believes that Indian could export another 4-5 lakh bales to Pakistan.
Historical trends suggest that the maximum that Bangladesh has bought from India is around 25 lakh bls in 2010-11. In current year, Bangladesh imports are assumed to be at record at around 72 lakh bls and so is her consumption at record at 74 lakh bls. Exports to Bangladesh in Oct-March has been around 15 lakh bls and another 10 lakh bls potential remains if India has the quantity and the price.
Block of Far East nations is another destination that has continued to buy from India, Vietnam being the biggest buyer and Indonesia being a regular buyer on weekly basis. On average they have maintained the share of around 21% in calendar 2016. The trend could continue at a competitive price.
Effectively 75-80 lakh bales of total exports look very much on card. This is a price supportive element and could see prices gain further from here, unless the global markets crash unexpectedly.
Globally the unexpected rally in China market and balance sheet tightness in the world excluding China has resulted in the spurt in the prices. Rally in cotton prices is also a result of an overall rally in global commodity prices due to the weak dollar. CRB index of Global Agri Spot prices have rallied by more than 12% since the beginning of the year. Dollar index has weakened by around 6% after touching a 13 year high of 100.5.
Global rally looks like sustaining even at higher levels. Current prices have increased the cotton prices in China, reducing the possibility of Chinese raw cotton getting offloaded in the global markets. Stock to Use Ratio of world excluding China is in any case tightest since 2009/10. Chinese auctions are likely to begin on 3rd May 2016. The current rally in Chinese market could possibly be to get better auction prices.
TECHNICAL OUTLOOK
Ny Cot Exchange Cotton No.2: Bullish Reversal likely
NY COT EXCHANGE Cotton No.2 (Price figures in cent/5000lbs):
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The monthly chart is shown for period September 1997 to till date which covers the major rising leg from 28.20 to 227 during the period 2001 to 2011.
The correction or the bearish phase is being witnessed since the peak of 2011 at 227.
Positive divergence on RSI and Stochastic has been witnessed as Cotton made a new low of 55.66.
On the monthly chart, the swing as per bias theory appears to have turned and swing bottom is in place. Higher low and higher high is being witnessed after the last month’s low of 55.66.
Resistance is at 65.23 and 68.13.
Wave e to terminate Wave (a) or Wave B can be confirmed if breakout and close above 68.13 is witnessed.
The last falling swing was from 68.13 to 55.66.
The 61.8% retracement has been crossed which us at 63.55.
Expect 68.13 to be tested in near term to short term.
In the event of a breakout and close above 68.13, a rally to 75.59 and 88.54 will get tested.
The 23.6% retracement of the entire fall from 227 to 55.66 is at 96.40.
Till now the band of movement was 68-57 and got stretched down to 55-68.
The band is in existence since 2014.
Strategy
Long term trend suggest accumulation on correction till 55.66 is not violated. Accumulate at 62.06-59.63 with a stop loss of 55.66. Expect 65.23 and 68.12 to be tested. If the bottom of 55.66 is not violated in time to come then eventually a rally to 96 can happen in its own time. On conservative basis traders can first look at 65.23 and 68.12.
Conclusion
Reversal looks likely to be in place for bullish moves for medium term long term.
(By Commoditiescontrol Bureau; +91-22-40015533)
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