The cotton market had a strong week, settling at 85.88 c/lb on the December contract, up 256 points.
The strength in the market early in the week caught many analysts off guard after some good rains over the bank holiday weekend in Texas. Despite the potentially bearish rains, the market finished up 150 points on Tuesday with some pointing at demand from China as possible reasons. There is also a rumor from China this morning that the reserve will release 600k MT of cotton from the end of June for a 100 day period.
On Friday the market closed up 100 points. The US added 980k jobs in May, the strongest in almost a year, and was well above forecasts of 680k. The US dollar strengthened on the news and closed at nearly 1.21. The cotton market followed this strength up.
The demand for cotton remains strong, particularly out of Pakistan. As mentioned previously, small lots of local cotton in Pakistan are trading at over $1 / lb, hence why imports remain active especially on cheaper origins including WAF, Argentina and US recaps where available. We cannot forget improving enquiry from China also, as they were looking for Brazil and US for July / August shipment, offers that are few and far between.
Good demand is also reported out of India, as the local market remains very active and prices there increasing nearly 5% in the week. The CCI are now down to fewer than 3 million bales in stock and arrivals of current crop are at season lows. Without the import tax on cotton we would no doubt see a very active India in the import market. There is still time for that to happen.
The US reported an excellent sales and shipment figure, which was not expected. The situation in the US and even globally remains very tight with regards to stocks. We have to wonder where mills are going to buy their high grade cotton over the next few months before the US and Brazil crops start. In West Africa perhaps, but this has started to sell very well over the last month and very little will come from the US, Brazil and Australia over the next three months. It’s not a surprise that the basis is firm for the higher grades.
One snag to this above picture is the nightmare of shipping. Out of Australia there have been huge spikes in freight rates to a variety of destinations. Traders now wait nervously for the rates from other origins for the third quarter. This added cost will be passed back to the mills, strengthening the basis further. One major shipping line cancelled all bookings from West Africa to Bangladesh last week, leading to more delayed shipments and pain for the merchants.
Despite the good demand picture, we should not take our eyes off the ever improving climatic conditions in the US. The June WASDE will likely see an increase in US production. The see-saw nature of the market will likely continue, bullish consumption, bearish on the rains. We expect this mid to high 80’s range to continue until that US picture becomes clearer.
Source: Mambo