CTN23 86.42 (+2.94)
CTZ23 81.58 (+2.11)
CTH24 81.49 (+1.93)
Zhengzhou WQU23 – 16,025 (+495)
Cotlook “A” Index – 94.15 (+0.40) – 31st May
Daily volume – 58,720
AWP – 69.08
Open interest – 197,275
Certificated stock – 63
N23 / Z23 spread – (4.84)
Z23/H24 spread – (0.09)
July Options Expiry – 9th June 2023
July 1st Notice Day – 26th June 2023
December Options Expiry – 10th November 2023
December 1st Notice Day – 24th November 2023
Introduction
– In a departure from our usual focus, we will lead with events on the CZCE. The lead month Sep contract was on fire today, reaching a high of 16,465 RMB/MT before falling back to close at 16,025 RMB/MT up 495 RMB/MT on the day.
– As always when there is a sharp move in China everyone has a reason why. Amongst the cacophony, two explanations seem to have come to the fore. The first is that the published CNCE estimates of Xinjiang commercial stocks as being above 4 MMT are incorrect and, in fact, it is really half of this number. Coincidentally, the writer had the great pleasure of presenting to the ICA Complete Cotton course today on the topic of Supply and Demand. One of the topics I discussed was my old mantra that S&D represents the buyers’ ability to buy and the sellers’ ability to sell. In other words, the market ultimately trades the cotton that can be bought and sold at any given time, not the numbers on a reported balance sheet. The 2 MMT of Xinjiang cotton in question did not disappear overnight and, thus, lead to today’s price action, if there are genuinely 2 MMT of cotton less on China than previously thought, then this would date back over the course of the season (if not longer) and the Chinese market would have been trading much higher all season long, not just today.
– A second, and in our view, much more plausible explanation, is that the recent disappointing slew of Chinese economic data (keep reading for more on this subject!) will soon result in the Chinese government unleashing a wave of economic stimulus, in particularly aimed at the property sector. Whilst this would undoubtedly give a short term sugar rush to the Chinese economy, it is questionable whether the impact on the global cotton balance sheet would be anything more than negligible.
– Sparked by the rally in China and, undoubtedly aided by the positive political news in the USA, where the bill to lift the debt ceiling passed Congress (the biggest hurdle) and will now pass to the Senate, ICE futures rallied strongly. Whilst Dec ’23 is now the lead month by virtue of having the greater open interest, we should also, not forget old crop July ’23 just yet. July ’23 finished the day at 82.46, up 294 points, whilst Dec ’23 closed at 81.58, up 211 points.
– In Brazil there are still significant stocks of old crop to ship. A good portion of this is existing sales that have been delayed and have not shipped, but old crop ending stocks are also notably higher than is usual or comfortable. Further to this, the new crop, whose arrival is imminent, is progressing very well and is tipped by more than one person we have spoken to recently to top 3 MMT!
– West Africa is in a not too dissimilar position with large stocks of both unsold and sold, but unshipped, old crop remaining at origin. This means that cotton is piling up in country, the government sellers in the region are pushing merchants to ship what they have bought. It is also very likely that, before too long, the same sellers will be under pressure to move the unsold stocks by way of more aggressive offering levels.
– It has been raining in Texas, if you haven’t heard!! In fact, there have even been some reports of localised flooding. The below drought monitor graphic shows the ever improving conditions in the state and it looks like the conditions for a good Texas crop are improving by the day.
– China’s Covid reopening boost seems to be petering out disappointingly quickly. The manufacturing PMI index fell to 48.8 in May from 49.2 in April signalling a second month of contraction – though it must be noted the Caixin PMI number was reported today as being 50.9, which would signal an expansion.
– The key property market is beginning to be a source of real concern once again. Property sales slowed in April and were reported as 63% of 2019 levels. This is compared to 95% in March and sales do not appear to have improved during May. Anecdotally, we are told that sales below 85% of 2019 levels are unsustainable for developers and that, if these low sales levels persist, trouble lies ahead for the industry.
– The impact of these economic woes are being felt acutely by the young, with levels of youth unemployment growing rapidly as can be seen below.
– The USDA export sales report will be released tomorrow due to the holiday shortened week.
– The CFTC cotton on call report based on positions as of 25th May consists of only the July contract for this crop year. The net on call sales position stands at 12,111 contracts following fixations of 3,176 contracts on the week. Unfixed buyers continue to exit this market, eroding the limited buying support.
– Looking at new crop, the net position stands at 4,342 contracts. This is the third smallest position for this week of the year and, furthermore, we have to go back to the 12/13 season to find a comparable year when the position stood at 3,037 contracts. In the intervening period the next smallest position was 15,969 contracts in 14/15, whilst the highest was 83,064 contracts in 18/19.
Conclusion
N23 has been trading between 76.25 and 89.59, being a range of 13.34c/lb for over 7 months. Last week, we questioned whether the market could retest recent lows, only to see a subsequent strong rebound. Nevertheless N23 remains within it’s nearby range of 79.52 to 87.52. The one certainty in our mind is that this contract month will see continued volatility within this range and and perhaps even the wider range of the highs of 89.59 and chart gap down to 74.85. There are likely to still be some wild moves into expiry of the N23 contract and trading this month should be avoided if at all possible! New crop Z23 has been less volatile, trading between 74.25 and 86.98, being a 1273 point range over the same period. EAP suggest this contract is fully valued in the mid to high 80’s and maintain that end users should only consider a scale down long and/or “on call” fixations from the mid 70’s, to maybe into the 60’s at some point!
Useful links
*Please note that we only share CFTC CTO on weekend reports.
Written by:
Jo Earlam
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