CTN23 80.64 (-1.15)
CTZ23 79.60 (-0.51)
CTH24 79.71 (-0.47)
CTK24 80.06 (-0.31)
CTN24 80.33 (-0.14)
Zhengzhou WQU23 – 16,860 (+55)
Cotlook “A” Index – 92.75 (-0.50) – 14th June
Daily volume – 36,037
AWP – 69.38
Open interest – 169,708
Certificated stock – 17,918
N23 / Z23 spread – (1.04)
Z23/H24 spread – (-0.11)
H24/K24 spread – (-0.35)
K24/N24 spread – (-0.27)
July 1st Notice Day – 26th June 2023
December Options Expiry – 10th November 2023
December 1st Notice Day – 24th November 2023
Introduction
– As we move towards the expiry of the old crop N23 contract Z23 is firmly established as the front month by virtue of open interest, however, at this most volatile of expiries we can never ignore the expiring month. Following an (in our view) unwarranted spike into the high 80s early this month N23 has slowly deflated to close today at 80.64.
– As the “front” month has fallen the N/Z spread has now come in to 104 points and, absent the support of July, December has dropped below 80, closing at 79.60 today, and we would expect further weakness ahead.
– Destination markets are uniformly quiet. Demand seems to be limited, at best, to sporadic, discounted lots that merchants are looking to dispose of on the cheap. Mills that are in the market are reducing their target volumes and operating very much on a hand to mouth basis.
– This sluggish demand is replicated in the pace of execution of shipments and this is being exacerbated by slow issuing of letters of credit, particularly in Pakistan and Bangladesh. In West Africa there are large stocks of cotton that remain unshipped by merchants. The West African sellers are usually very flexible when it comes to shipments, but cotton is also an important cash crop in the region and we have heard that, in some instances, the local government sellers have requested pre-payment in order to extend shipment beyond the contracted period.
– US CPI rose 4% in May, the lowest rate in two years. US inflation has now moderated sharply from a peak of 9.1% a year ago. In response the Fed held interest rates steady after 10 consecutive increases. However, there was a sting in the tail as they indicated there may be two more ¼ point interest rate rises before the year is out.
– In China, policy is moving in the other direction. The PBoC, today cut the medium term lending rate from 2.75% to 2.65% with more stimulus measures expected to be announced shortly. May data released by the National Bureau of Statistics was roundly disappointing. Pertinently to cotton consumption retail sales grew 12.7% year on year in May, down from 18.4% in April.
– The CFTC cotton on call report based on positions as of 9th June displayed a dwindling old crop net on call sales position, which stood at 7,840 contracts on the day of reporting and is likely now lower still. For new crop the position is the 2nd smallest on record at 7,549 contracts and is even less positive for the Dec only position which, at a mere 314 contracts promises little fixation support to come.
– The USDA export sales report dated the week ending 8th June dropped to levels reflecting the lack of business being seen in recent weeks. Net current crop sales were reported as 98,900 bales with China once again the largest buyer at 70,500 bales. For new crop 65,700 bales were reported, with China again taking 63,800 bales. Outside these purchases, driven by the spread between imported and Chinese domestic cotton, there is little demand to be found in the wider consuming markets.
Conclusion
N23 has been trading between 76.25 and 89.59, being a range of 13.34c/lb for over 7 months. The last two to three weeks have seen much volatility, yet, N23 remains within its 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 until expiry, one should avoid 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!
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Written by:
Chris Williams
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