Zhengzhou cotton futures market was range-bound between 14,950yuan/mt and 15,450yuan/mt after the Chinese Lunar New Year, with a fluctuation of 500yuan/mt. However, spot cotton prices changed very limitedly. In the first week after the holiday, traders basically returned and started work, and ginners in Xinjiang also resumed operation in the second half of the first week. Most ginners in inland recovered transactions around Lantern Festival. Downstream plants’ operating rate was low as workers have not returned fully, so transactions of cotton were bleak in the first week, even on Feb 13, ZCE cotton futures market slumped and on-call cotton saw obvious price edge, the transactions did not improve much. Mills basically restarted production in the second week, except a few mills in Yangtze River and Pearl River.

Spot cotton prices were steady, and offers adjusted up by about 100yuan/mt after the holiday, while trading prices basically stayed flat. When the ZCE major cotton contract, May contract, hovered around 15,100-15,500yuan/mt, the sales were hard to be stimulated.

Mills focused on de-stocking first in Feb, and showed low buying interests on cotton, so cotton inventory in mills reduced.

Currently, there are several contradiction to hinder cotton prices upward.

1. High commercial cotton stocks
Currently, cotton supply is sufficient, and commercial stocks remain at high level after the end of state cotton reserves. Actually, inventory is always high at this time of the year, but with the lower reserved cotton stocks and the state cotton auction, the higher commercial stocks fulfill the risks of supply gap.

CCFGroup revises lower the 2018/19 consumption by 4%, based on the speculative demand from downstream industrial chain, some spinning capacity transferring to Southeast Asia (especially Vietnam) after levying additional 25% on US cotton, and the possibility of some spinning mills eliminating or turning to other products. If spinners have profits, the possibility of elimination and turning to other products is limited, and rigid demand for cotton in domestic market may maintain.

The elasticity of speculative inventory is high, and the key is to see the price increment of downstream products.

2. Import quotas
In 2019, WTO-related tariff quotas on cotton remain at 894kt, and there are expectations that cotton quotas may increase in 2019. But due to 800kt of sliding-scale duty quotas in 2018, the sources that can be purchased in the first half year of 2019 are reducing.

Currently, the quality Australian and Brazilian cotton is limited, and Australian cotton output is expected to reduce in 2019. Though Brazilian cotton areas are supposed to rise by 33%, but the earliest shipment is around Sep, 2019. African cotton is mainly purchased by East Europe and Southeast Asia. Indian cotton supply is available, but prices are increasing supported by MSP.

So, the sources that could be selected in the first half year of 2019 are limited, which may ease the supply pressure.

3. High warehouse receipts
Currently, new cotton warehouse receipts are almost all covered in the ZCE May contract, and will continue to increase as ZCE cotton futures market moves up recently. By Feb 21, the warehouse receipts of 2018/19 cotton are 15,175 lots, or 607,000 tons; May-Sep cotton contract spread is only 440yuan/mt, and in inland delivery warehouse, the reasonable price spread is around 580yuan/mt. In the case of speculative long positions not taking warehouse receipts, a strong demand for extension may see.

Conclusion:
Currently, the negative factors are gradually weakening, while the bullish factors are gradually strengthening, and the direction is changing. However, market participants remain cautious and require to have capital at hand, so Chinese cotton prices is expected to move up, but the fluctuations may be frequent. For ICE cotton futures, with expectations of higher global cotton output and US loosing orders from China, the price trend may be weaker than that of ZCE cotton futures in the first half year.