Thursday Cotton Bullets – 03/02/2022
A slow boat to defaults
CTH22 127.62 (+1.29)
CTK22 124.73 (+1.70)
CTN22 121.58 (+1.72)
CTZ22 103.88 (+0.93)
Zhengzhou CF205 – 21,600 (CNY)
Cotlook “A” Index – 141.10 (unch) – 3rd Feb
Daily volume – 41,556
AWP – 112.43
Open interest – 261,598
Certificated stock – 617
March/May spread – (+2.89)
March Options Expiry – 11th February 2022
March 1st Notice Day – 22nd February 2022
– After making new highs of 129.37 on Tuesday, the market has had the feeling of a correction and, as can be seen from the chart below, we have certainly been in overbought territory. However, after a weaker start today, a boost came in the form of a strong export sales report (below) pushing us to a new high close for the season at 127.62 basis March ’22, up 129 for the day.
– All readers will be more than aware of the shipping issues prevalent across the world. The recent Q3 figures released by shipping firms have shown just how well they have done out of this debacle. In fact, CMA CGM, Maersk, COSCO and Hapag Lloyd all reported larger incomes than Amazon and Netflix, two of tech’s supposed main beneficiaries of global lockdowns!!
– The logistics group Kuehne + Nagle have developed a new index to display the overall time ships are waiting to berth in terms of TEU (20FT equivalent units) waiting days (displayed below). “Normal” would be considered roughly 1 million TEU waiting days, last week we reached 12.5 million TEU waiting days!
– During our visit to Pakistan last week many mills expressed concern around the shipping delays, but this was beyond the mere operational difficulties of having shipments arrive late. Given the delays many have seen to date, they have very real concerns that contracts priced on N22 and even K22 will not arrive until the current crop months are well off the board and the markets for both cotton and yarn are pricing based the currently, significantly discounted Z22 contract. Furthermore, mills complain that some merchants are often only advising delays once cotton is fixed and letters of credit are opened, even though (so the mills believe) the delays were entirely foreseeable on the part of the merchant. Therefore, locking the mills into a price set long before eventual shipment.
– The mills we met with last week are all reputable customers who stressed that they will honour their commitments regardless. However, we should all be aware that there are many out there who do not fall into this category. The combination of the N/Z inverse and excessive shipping delays are currently a major risk for contract performance.
– The CFTC Cotton-on-Call report, based positions as of 28th January, showed that some mills are feeling the pressure and fixing at these elevated levels with net 6,807 contracts fixed on H22 for the week. Nevertheless, net on call sales for the March contract are still the highest ever for the time of the year at 29,585 contracts. Worryingly, given the N/Z inverse and our above comments, the July ’22 position continues to build and now stands at 47,351 contracts net, again, the largest ever for the time of year.
– The USDA export sales report was extremely impressive with 647,200 bales reported across two crop years. Net current crop sales of 332,100 bales were led by China (90,200 bales), Vietnam (58,700 bales) and India (44,100 bales). In all 18 markets were reported as buyers with 7 of them reporting over 10,000 bales net. For new crop 315,100 bales were reported with Bangladesh the largest buyer at 105,600 bales. China also weighed in with 61,600 bales taking its total to 154,300 bales once Pima is included. Shipments finally showed some signs of intent with 302,100 bales exported, still off the pace required, but certainly moving in the right direction!
Cotton has set yet another new seasonal high at 129.37 and looks set to test 130c/lb before the final seasonal high is made and we suggest is likely to come in late February to early March 2022 based on our current guesstimates. Noting what is going on in outside markets we suggest (if possible) that a flat position in Cotton is probably the safest course of action at the present time! Corrections will be short lived, and the market will remain volatile until long funds and unfixed end users have taken off their bets. Once that has occurred the Cotton market will return to normality and the “it’s different this time” crowd! will have learnt a valuable lesson!
*Please note that we only share CFTC CTO on weekend reports.
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