Cotton textile industry starves for "lower supplied" reserved cotton in 2019
Cotton textile industry starves for "lower supplied" reserved cotton in 2019

Cotton textile industry starves for "lower supplied" reserved cotton in 2019

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On April 23, the National Food and Strategic Reserves Administration and the Ministry of Finance announced about state cotton auction and reserve in 2019. The state cotton reserves sales will be from May 5 to Sep 30, with a total quantity of about 1.00 million tons. In principle, daily selling volumes are about 10,000 tons. The calculation of base selling price of reserved cotton keeps unchanged, and the price continues to be related with international cotton prices. In additional, the announcement also states that the state cotton reserves may be implemented, according to actual market situation and supply and demand.

Then, for this announcement, is there any difference compared with previous years, and how to interpret it?

2015 2016 2017 2018 2019
Release institution National Development and Reform Commission and Ministry of Finance National Food and Strategic Reserves Administration and the Ministry of Finance
Release date 2015.7.7 2016.4.15 2016.11.22 2017.11.6 2019.4.23
Auction time 2015.7.10-8.31 2016.5.3-2016.8.31 2017.3.6-2017.8.31 2018.3.12-2018.8.31 2019.5.5-2019.9.30
Delay time 9.1-9.30 9.1-9.30 9.1-9.30 -
Traders No restriction No restriction Not allowed from Sep Not allowed from Jun 4 No restriction
Daily selling volume No more than 50,000 tons 30,000 tons 30,000 tons 10,000 tons
Planned total quantity 1 million tons No more than 2 million tons To increase the daily selling volumes and extend the selling time if the trading ratio is above 70% for 3 days within one week 1 million tons
Task Consuming reserved cotton gradually Guarantee market supply Rotation
Trading volume 60kt 2.659 million tons 3.23 million tons 2.51 million tons ?

1. The National Food and Strategic Reserves Administration becomes the dominated institution.
2. The state cotton auction is confirmed late this year, but market players have anticipation.
3. The time is confirmed to last to September.
4. Traders may be allowed to take part in the auction in 2019.
5. Daily selling volumes decline to 10,000 tons.
6. The total quantity of cotton auction is about 1 million tons. The task of de-stocking has been complete, and the task for late market is the rotation.

Key point one: the quantity

Currently, the remaining reserved cotton left in the state warehouses is projected at about 2.75 million tons, except the loss of weight, about 2.5 million tons of reserved cotton are estimated to be in the warehouse. The announcement states clearly that the total selling volumes are about 1 million tons, with a daily volume of 10,000 tons. During the period, the working days are about 106, if the policy has no adjustment, the actual trading volumes will not surpass the planned selling volumes too much. Combined with the government policy guidance, the task of state cotton auction in 2019 is no longer the “de-stocking”, but the “rotation”. Therefore, the quantity is with restriction this year. According to our estimation, the reserving volumes are not expected to be higher than the selling volumes, and the reserved cotton stocks are estimated to be controlled in the range of 2-3 million tons.

What does the daily selling volumes of 10,000 tons mean? During 2017 and 2018, the daily selling volumes were 30,000 tons, and the daily trading volumes were averaged at 21,939.8 tons and 17,579 tons respectively. Moreover, traders took part in the auction for some time. Actually, mills’ demand for reserved cotton is higher than 10,000 tons. Under the 1 million tons of selling volumes in 2019, and there is no clear statement to show that traders are not allowed to take part in this year, reserved cotton may be lured much attention in 2019, and the players may show high enthusiasm to take part in.

Key point two: price and suggestion

The price spread between the average trading price of reserved cotton and Cotlook A is within 2,000-2,500yuan/mt in recent 3 years, lower about 1,000yuan/mt compared with the price spread of new cotton and foreign cotton, so domestic cotton yarn competitiveness improved largely. In 2016-2018, mills’ profits improved largely. In the meantime, the new spinning equipment volumes were larger than eliminated, so cotton yarn output increased somewhat, weighing on cotton yarn imports. In 2019, as the supply of reserved cotton is less, and traders may be allowed to take part in the auction, the trading prices of reserved cotton are estimated to be strong, even though, the reserved cotton still has high cost performance, easing the high feedstock costs for mills.

For cotton prices, cotton supply is ample in 2019, and the sales of reserved cotton increase the market supply, and prices are relatively low, which is anticipated to drag down the overall price level on the market. Moreover, textile market is not active in buoyant season, and the cotton textile industry is relatively cautious. With the impending state cotton auction, it is key to see whether the industrial chain can be recovered. From the angle of ample supply in short term and lackluster demand, the market is expected to be bearish, and futures and spot market may turn downward. But in the medium to long run, with the tight supply of reserved cotton and the bottom-up of the economy from capital market, futures market may recover first, supportive to spot market.

For imported yarn, in long run, with the reserved cotton flowing into the market, imported yarn is hard to increase. Currently, with the limited supply of reserved cotton, and possible higher prices, the dampen on imported yarn market weakens.

For domestic mills, especially for mills that use reserved cotton, reserved cotton supply is limited this year, so it is suggested to be active to take part in the auction. With the participation of traders, trading prices may push up, so mills can cooperate with traders.




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