– The slow pace of China Reserve buying has proved somewhat puzzling when placed against reports of still ample supply in China, sluggish demand and what has proven to be lacklustre market performance over the period of the purchase (on the first day of the purchase the CZCE front month closed at 15,220 vs. 13,420 today). Just 86,720 MT has been purchased to date and the aforementioned conditions would certainly suggest that should be a much higher volume.
– Reports in the country are that there are, at least, 1.25 million MT of old crop Xinjiang unsold, whilst the new crop harvest gathers pace. The lack of deliveries to the reserve under these conditions would suggest that stocks are, in fact, much tighter than believed. But in that case, how to explain the price action?? Of course, demand is poor and mills are struggling, but if cotton was so thin on the ground one would expect at least a small supply squeeze on prices to the upside.
– One explanation we hear is that the mills are buying the cotton and, over the course of the purchase programme, the reported free stock has come down by about half. Nevertheless, at this pace to get down to zero would take us into the new year.
– The answer may actually lie in perception. As we know, the bulk of Chinese cotton is now produced in Xinjiang and, to state the obvious, Xinjiang is far away. In the past, when the bulk of the Chinese crop was produced in the Eastern regions the market would already be receiving new arrivals in large volume at this time. Now however, the first trickles of Xinjiang new crop are only just beginning to be shipped east and it will only be December and January before we see a healthy volume of new crop available in the east coast textile markets. When we view it through this lens, 1.25 MMT is not actually that much cotton. In fact, if we look at China free stocks at the end of October for the last five years the current level falls right in the middle!!