CTH23 80.85 (-0.98)
CTK23 80.65 (-1.04)
CTN23 80.39 (-1.01)
CTZ23 78.03 (-0.82)
Zhengzhou WQK23 – 13,625 (-40)
Cotlook “A” Index – 102.75 (+0.65) – 7th December
Daily volume – 22,124
AWP – 73.03
Open interest – 195,464
Certificated stock – 8,901
H23 / K23 spread – (+0.20)
K23/N23 spread – (+0.26)
N23 / Z23 spread – (+2.36)
March Options Expiry – 10th February 2023
March 1st Notice Day – 22nd February 2023
Introduction
– Perhaps it is a gut feeling, but the market does seem, this week, as if it is running out of legs a touch. Throughout the week, the market has notched up impressive early gains in early trading, only to retreat as the day has evolved, ultimately finishing either down on the day or which much reduced increases. Today was no different, after reaching as high as 84.10 in earlier trading (up 227 pts on the day), the market once again reversed to close the day at 80.85 usc/lb basis the H23 contract, down 98 pts on the day.
– China’s relaxing of it’s Zero Covid doctrine has caught many headlines across the world and represents a glimpse of optimism for the cotton market. However, we should approach this with a healthy dose of caution. Any movement away from Zero Covid will likely be more cautious and gradual than the rush we saw to open in many countries in the West. It may be further complicated by the concerning numbers of elderly unvaccinated who will be particularly at risk by an upsurge in infections within the community (which we are already seeing).
– In purely cotton terms a fully open China will of course be positive for both end user and mill demand, but again the effects will likely be more gradual. Firstly, any improvement in Chinese consumption will likely turn to domestic cotton which is priced at around par with the international market (despite much excitement around Xinjiang cotton bans, the main purchasers of US cotton over the last year have remained the government houses). Over time, this will begin to benefit the mills overseas. Currently China is looking to export yarn at discounted levels. As domestic demand improves this situation should reverse and we should see import yarn demand, which will, in turn, boost cotton demand from countries such as Vietnam and Indonesia. Finally, a healthy Chinese mill community will, hopefully, return to the import market.
– Overall, recent moves in China do give us some cause to be positive towards the health of the cotton market, but this must be kept in perspective. The improvements we would hope to see will be, at best, in the medium term, and will do little to improve the current, horrendous demand outlook.
– Insects known as jassids have infested cotton crops in West Africa. Whilst the parasites are causing reductions to cotton crop production estimates there are also rumblings about quality impacts and, because of this, there is a shortage of longer staple cotton WAF being offered with most Mali Juli/S 1.3/32” to 1.1/8”.
– This week’s USDA export sales report was at least a further week of improvement with 32,600 bales reported for current crop and 26,400 bales for new crop. Reports of cancellations continue in the market. That we have only seen one week of net reductions so far may well be manipulated reporting, but it is also fair to say that a merchant will look to exhaust all possibilities to keep a contract alive, so there may well be contracts out there that are effectively “dead” but are not yet “cancelled”. Exports of 141,100 bales were reported.
– The CFTC cotton on call report, based positions for the week ending 2nd December showed net on call positions little changed over the week. Overall current crop positions were reduced by 1,286 contracts, with reductions spread reasonably equally over the 3 active contract months. The current crop position is the eight highest for this week of the year and, it is fair to say, that the on call position is not a huge market driver at this time.
Conclusion
The cotton market has found resistance just under 90c/lb basis H23. We maintain that for H23 we see prices in the mid to high 80’s as fully valued and any move for this contract into the 90’s as an outright selling opportunity for the rest of the season ending 31st May 2023. Our bearish stance is based upon a lack of demand which will eventually be addressed by continued monthly WASDE reductions to world consumption. We would not want to be short Cotton long term under 70c/lb but feel a sideways market is likely for the rest of the 22/23 season!
Useful links
*Please note that we only share CFTC CTO on weekend reports.
Written by:
Jo Earlam
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