Cotton Weekly: Good Demand Supports Indian Market

MUMBAI(Commoditiescontrol)- US Cotton market showed a firmer trend gaining support from on-call fixations in December and March. The Indian market is witnessing slow rise in demand amid sustained supply trend.

US MARKET:

The US ICE Cotton futures showed a firmer trend with the March contract rising nearly 21 points to settle at 69.35 cents/lb on Friday.

The market is receiving support from the large mill on-call commitments which is at 14.75 million bales overall, of which 1.57 million were on Dec and 4.96 million on March. The effects of which is seen on the soon to expire December contract where prices were rebounding from 67 cents level.

Ever since the crops got planted this spring, the bears have been in control of the narrative, telling the market how much prices were going to collapse due to all this excess cotton that would accumulate around the globe. Prices in the high 50s or low 60s seemed to be just a matter of time, which prompted merchants to push cheap basis sales and mills were happily buying them in anticipation of lower prices.

The second factor is quality, which isn't as good as last season in some of the major crops . For example, in the Memphis classing office the predominant quality grade is a 31-4, while in Lubbock around 35-40% are below 3.5 mic.

Further, exports sales showed strength touching a marketing year high for the week ended November 10. The US export sales continued to surprise traders, as 525,000 running bales of Upland and Pima cotton were sold last week. Pakistan took the lion’s share with 290,300 running bales, leading a field of 15 other buyers.

Shipments remained slow at just 100,600 running bales, which may have to do with the quality situation. Total commitments for the season have now reached 9.7 million statistical bales, of which just 2.1 million bales have so far been shipped.

The relatively high open interest in December, which was still at 19,350 contracts as on Friday, tells us that there are still quite a few fixations to be done. This should continue to underpin the market as we head into the notice period a week from now.

Once December is out of the way we might see a slightly softer market for a while, but with five million bales to be fixed on March we feel that the downside is limited to around 66-67 cents, unless something were to spook speculators into selling.


Technical Ideas(March): Sideways movement continued and upside momentum can resume if prices close above 70.23 while support is seen between 68.60-67.95.

CHINA FUTURES MARKET:

The ZCE Futures traded in a tight range for the fourth consecutive week with the benchmark January contract ending the week marginally lower.

The benchmark ZCE January futures settled at 15,035 yuan/tonne on Friday, lower 1 percent from Nov 10 amid 0.4 percent decrease in open interest to 165,908 lots indicating minor short covering.


Technical Ideas: Sideways and oscillation could occur around the Daily Reversal Value (DRV) at 15,135. As support level of 15,090 was breached hence lower range of 14,923-14,618 could likely be tested. Exit long position and sell on rise from 15,035-15,228 with a stop loss of 15,311.


INDIAN FUTURES MARKET:

The Indian cotton futures moved higher on good buying in the market snapping from a two week downtrend.

The benchmark December futures settled at 18,470/bale on Friday, slightly higher Rs 300(1.7%) over the week. Open interest increased 17 percent, over the week, at 4,616 lots(1.15 lakh bales of 170kg).



Technical Ideas: The market has witnessed additional long position and the first objective would be to cover short position at 18,470 or below as the opportunity arises. Expect price to rise towards resistance levels of 18,580-18,900. Weakness would resume if market breaches 18,100.


INDIAN SPOT MARKET:

After witnessing two consecutive weeks of weakness, weekly domestic spot prices showed a mixed trend on heels of good demand from local spinners amid sustained rise in supply.

Prices mainly gained nearly 1 percent across major markets of North India, Central India witnessed marginal changes or rather a sideways trend while South India persisted downtrend for the third consecutive week.

Demand witnessed revival, however on a hand to mouth basis, after prices fell nearly Rs 1,800-2,600/candy(5 to 7%) in matter of one month as supply dominated the market.

Further, good turnover in the yarn market as encouraged various spinners to resume procurement of cotton for replenishing their inventories and to meet their near term demand.

Yarn prices have increased nearly 3 to 4 percent in the past three months mainly for the Warp count yarns and various spinning mills have stopped to offload their stocks at a buyer’s discounted rate.

The other factor which has supported the prices in the past few weeks is the reverse charge mechanism(RCM) announced by the GST council whereby the ginners procure the cotton at 5 percent GST from farmers however will not be able to get a set off while selling to exporters who will procure at 0.01 percent GST.

Various experts believe that the RCM will have a temporary effect on cotton prices for the short term after which the tension will settle down. The Cotton Association of India(CAI) has written an official letter to the GST council regarding the negative impact on the ginning industry after implementing RCM. Various traders have preferred to wait until the next GST council meeting.

Meanwhile, New crop supply for the week(Nov 13-17) rose marginally to an estimated volume of 6.74 lakh bales compared to 6.465 lakh bales in the prior week(Nov 6-10) and was significantly higher compared to same period last year at 3.23 lakh bales.

Farmer were selling their produce at good rates ranging between Rs 4,000-4,800/quintal for the third consecutive week, not just in Gujarat but other states too and was more or less close to the raised MSP of Gujarat. The Gujarat government offered farmers Rs 500/quintal bonus on central government set Minimum Support Price(MSP) took the medium staple cotton MSP to Rs 4,520/quintal and long staple to Rs 4,820/quintal.

However, daily new crop supply witnessed a sustained trend of an average daily arrival at 1.34 lakh bales which was lower than market expectation of 1.5 lakh bales. Arrivals were sluggish as some farmers have withheld selling their produce at lower rates in anticipation of receiving higher than prevailing markets. Some farmers were expecting raw cotton prices to touch Rs 5,000/quintal. Hence, arrivals may likely pick up during the month of December which could limit upside.

The recent survey of cotton crop across the Hinganghat region of Maharashtra showed that various farmers were suffering from quality issues due to pink bollworm and the heavy rains during the first half of October raised moisture content. This has impacted supply trend and harvesting progress in Maharashtra.

Traders were skeptical of production to reach 400 lakh bales, which were the early estimates, and now find 360-370 lakh bales much more believable and in line with our estimations.

Conclusion:

The domestic market may have likely found a sweet spot around the Rs 37,000-38,000/candy and everything will depend on how the demand/supply trend prevails going forward.

Demand is gradually picking up pace with local mills on the forefront while the MNCs/Exporters were procuring on a limited hand to mouth basis.

When MNCs/Exporters will return to full scale procurement then prices will persist uptrend as exports has a potential to grow, especially around the month of December-January after the RCM factor settles in. India has a potential to export around 60 lakh bales this season which is more or less similar to last season.

Further, the world cotton consumption is estimated to rise 4.4 percent to 152.5 million bales of 170kg compared to last year which will support export prospects.




(By Commoditiescontrol Bureau; +91-22-40015534)