– After a solid start, Chinese Reserve procurement has slowed notably this week with a low of just 480 MT purchased on Monday and around 3,000 MT daily has been picked up since then for a total now standing at 26,440 MT. On the surface this would indicate that the abundance of supply is not what it previously seemed and a better home for cotton is to be found in the open market. However, since the start of the Reserve purchase the CZCE has lost 1,325 RMB/MT whilst the CC Index has lost 1,820 RMB/MT. Cash business is reported as slow and taking place at around 16,000 RMB/MT. This is similar level to today’s Reserve price which suggests that those who need to buy are willing to match the Reserve but not outbid it.
– So, despite the slow pace the market is hardly screaming at us that supply is tighter than we think. A conclusion is tough to draw. Reports in country are that ginners are resisting delivering at these prices, where they would reportedly crystallise an 8,000 RMB/MT loss (over 50 usc/lb), and are pushing for an increased Reserve price and volume. There is even talk that this was pushed to President Xi on his visit to Xinjiang last week (always remember that the major ginner in Xinjiang is the army!).
– Whether this is indeed the case or merely market talk remains to be seen, but the action from here will give us a very good indication as to the China balance sheet. If supply is truly burdensome then at some point deliveries to the Reserve will have to pick up in pace. However, if deliveries do not pick up then this should also be accompanied by an appreciation in the domestic free market price which will indicate that supply is notably tighter than previously reported. Pay careful attention!!!
– In the rest of the world, China has been markedly absent in the yarn markets leading to a concerning build of yarn stocks in all major yarn producing markets. The lack of a bid on yarn has made it very tough to determine a break-even price for cotton purchases, though tentative indications are, at present, in the mid 90’s landed.
– At EAP we focus a lot on the importance of currencies but have perhaps neglected the Pakistani Rupee of late. Considering that Pakistan is both an important producing and consuming market the movement of the PKR is of significant importance. As can be seen from the chart below, it has been badly hit against the dollar in recent months. This of course makes cotton imports much more expensive against domestic production, however, it will have the advantage of making yarn spun from domestic cotton more competitive in the export market in dollar terms.