NY futures continued to slip this week, as December gave up another 148 points to close at 83.88 cents, while March was down 285 points to close at 82.14 cents.
The July notice period has been unfolding without any great surprises, as Glencore emerged as the big taker as rumored, stopping nearly all of the 1Ά426 notices that have been tendered so far. There were around 2Ά600 contracts still open in July as of this morning, which means that total deliveries may go up to 400Ά000 bales, or about two-thirds of the current certified stock. We see the events of this delivery period as supportive for December, since despite the lack of carry on the board there is a strong taker for a large part of the certified stock, while the remaining inventory remains in the hands of its current owners.
This suggests to us that most of this cotton will likely be applied against existing sales over the coming months and that only some remnants of the current certified stock may survive until December. With hardly any current crop inventory left by the time new crop comes off the field, December is a dangerous month to be short. The market is apparently coming to the same conclusion, as the Dec/March spread continued to invert this week, closing at 174 points Dec premium today.
Although some analysts seemed to be disappointed by todayΆs US export sales report, we are in the glass half full camp. Net new sales for prompt shipment (June/July) increased by 67Ά600 running bales, while commitments for August onwards dropped by 6Ά900 running bales. Sure, sales have tapered off compared to previous weeks, but thatΆs not really surprising considering that there is hardly any inventory left for sale. The fact that there were still 15 markets interested in buying these leftovers should be seen as a positive sign! Shipments were a bit light last week at 149Ά300 running bales, be we have to wait and see whether this was just an aberration or something we need to worry about.
There has been a lot of talk recently about the Chinese economy slowing down, which is interpreted by many fund managers as having a negative impact on commodities going forward. China's economy grew at its slowest pace in 13 years in 2012 and there are warnings that it could miss its growth target of 7.5 percent for this year. Premier Li Keqiang has tried to calm these fears by stating that the economy was generally stable and that growth was within a "relatively high and reasonable range". We agree!
Before getting too negative on China, letΆs put these growth rates into some perspective and look at what this all means in absolute terms. In 2004, ChinaΆs GDP measured around 1.95 trillion US dollars, growing at a phenomenal pace of 17.7 percent per year. In absolute terms this growth rate amounted to around 294 billion US dollars that year. In 2012 the Chinese economy started to slow, dropping to “just” 9.8 percent, although GDP had now reached 8.36 trillion US dollars, or more than 4 times the size of 2004. In absolute terms the Chinese economy still managed to grow by 1041 billion US dollars (1.04 trillion) in 2012, or more than 3.5 times faster than in 2004. You get the idea!
Even if the Chinese economy were to slow to a “disappointing” 7.5 percent growth this year, it would still translate into an increase of 627 billion dollars or more than two times the amount Chinese GDP grew ten years ago! Another factor to consider is that Chinese domestic consumption is growing rapidly, which is important when it comes to commodities, since we need to distinguish between the various raw materials China devours. While copper may currently have a hard time as the construction boom is slowing, this is not necessarily true for commodities like energy, food or fibers, as Chinese consumers use more and more of these items, with production often struggling to keep up.
So where do we go from here? With July almost a done deal, the focus is now squarely on new crop. TomorrowΆs US planted acreage report will give the market something to talk about, although we need to remember that a planted acre still needs to survive the growing season and make it through a later than normal harvest, which is particularly true in the case of West Texas. We feel that a number of around 10.5 million acres is currently in the market. As stated earlier, there is not much margin for error when it comes to the December contract, because inventories will be depleted and are not going to fill up before November, which makes the shorts vulnerable to crop problems.
Chinese support is still evident and could become more pronounced since Reserve sales are expected to be withdrawn at the end of July. This puts even more emphasis on imports of cotton and yarn to supply Chinese textile mills. In this regard we would like to mention cotton yarn imports for May, which at 146Ά264 tons were running over 40 percent ahead of a year ago, with Pakistan and India providing about two-thirds of the volume. With China waiting in the wings, we see it difficult for prices to drop much from current levels.
December has been trading in a sideways range of less than 8 cents (81.71 to 89.56) since early February and barring any unforeseen events in outside markets, we will probably remain stuck in this range for the foreseeable future.
Best regards
