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CTN23 86.66 (-0.28)
CTZ23 83.72 (-0.17)
CTH24 83.44 (-0.17)
Zhengzhou WQU23 – 15,805 (+85)
Cotlook “A” Index – 95.05 (+0.90) – 17th May
Daily volume – 51,315
AWP – 67.97
Open interest – 185,468
Certificated stock – 63
N23 / Z23 spread – (2.94)
Z23/H24 spread – (0.28)
July Options Expiry – 9th June 2023
July 1st Notice Day – 26th June 2023
– Cotton found a burst of life on Friday and has followed through this week, culminating in yesterday’s 356 point up move on volume in excess of 70,000 contracts. Following what could have been seen as disappointing export sales numbers today (given much of the talk in the market – below), we may have expected a break down in the front month N23. Indeed, it did fall to down over 100 pts in the immediate aftermath of the report, but recovered well to close the day at 86.66, down 28 points on the day. Nevertheless, we remain within the range of 76.25 to 89.59 in which we have been since November.
– Furthermore, yesterday’s rally in N23 was not replicated in the new crop Z23 contract and, as a result, we have seen the N/Z inverse move in to new territory, closing today at 294 pts.
– In Turkey the incumbent President Erdogan defied polling to finish in the lead after the first round of the Presidential elections. Although, he fell short of the 50% hurdle to win the first round outright he is now the strong favourite to win the second round. Given the president’s less than conventional views on economics and, in particular, the relationship between interest rates and inflation, this has not been received well by the markets, with Credit Default Swaps rocketing and concerns that a victory for Erdogan in the runoff will see the Turkish Lira falling further.
– A host of Chinese economic data was released this week and, on the whole, it was a disappointment. Whilst the year on year growth rates looked impressive this was simply a contrast with this time last year when much of the country was in lockdown. Industrial output expanded 5.6% against expectations of 10.6%, retail sales grew 18.4%, but were also below expectations.
– Over the past few days there has been much talk of sales to China and what this “must” mean: “The Reserve are in!!”, “China’s consumption is back,” etc, etc. We would suggest a less excitable conclusion. As can be seen from the chart below, the spread between CZCE and ICE or imported and domestic physical (as represented by the Cotlook A-Index and the CC Index), over the last few weeks was the widest it has been this season. As such, this would be a logical time for large SoE trading houses who are in possession of import quota, to step into the market, as it seems they did! As can also be seen, that spread has since narrowed significantly.
– The excitement around China often also forgets (or choses to forget!!), the reality of import quotas. Whilst there does seem to be less transparency than in the past around quota issuance to a handful of the large state trading houses, it remains that today, no general import quotas have been released above the 894,000 MT mandated by the WTO. If we look at the USDA export sales reports and take a crude starting date of 1st December, US sales to date, for arrival in 2023 total 1,071,460 bales or 243,500 MT. If we apply a rough, historical market share of 40% to US cotton then this would account for commitments just short of 610,000 MT of the 894,000 MT quota, and this is without factoring in any new crop sales arriving between August and December.
– This is, of course, very much a back of the envelope calculation and there are many variables to take into account. Nevertheless, we should be aware that, the buying we have seen so far, fits into the existing parameters of SoE buying, within the existing quota issuance. What we are not seeing is a consumption driven change in outlook, backed up by the quota-enabled ability to buy at the Chinese mill level that would be truly bullish.
– The USDA export sales report for the week ending 11th May disappointed given the much-discussed sales to China – they may appear next week, or whenever the reporter “remembers”. Total net sales for the week were reported as 132,400 bales. Sales were led, once again, by China with 62,000 bales and Vietnam with 24,000 bales. Exports continued to exceed the pace of roughly 278,000 bales a week needed to reach the USDA target with 332,700 bales shipped. Total sales now stand at 13.327 million bales and shipments at 9.409 million bales against the USDA expectations of 12.6 million bales of exports for the season.
– Whilst current crop sales are encouraging, new crop sales remain disappointing. Total sales reported today of 28,100 bales took us to 1.575 million bales for the season. As can be seen from the chart below, this is the lowest total for this point of the season in the last five years. “New crop” sales is often a misnomer when we are really looking at new marketing year sales. In other words, any sales made for shipment beyond August 1st. A good portion of sales considered “new crop” at this stage are in fact bales from the existing “crop” to be shipped in this period. With this in mind, the contrast between such strong reported “current crop” sales and such weak reported “new crop” sales, is certainly a strange one….
– As we approach the end of the 2023/23 season, the CFTC cotton on call report based on positions as of 12th May consists of only the July contract. The net on call sales position stands at 11,612 contracts, which is the 14th highest number for this week of the season and would act of a very weak source of support in the face of any fall in the market.
– Moving to new crop, the net position is, a mere 882 contracts net and is the smallest position for the week out of the 23 on record. For the front month December contract, the position is negative 2,998 contracts and represents a source of hedge selling above the market.
In view N23 has broken to the upside and above our anticipated 75-85c/lb trading range that we expected to see to the end of the current season ending 31st May we are forced to amend our conclusion viewpoint very slightly.
N23 has been trading between 76.25 and 89.59, being a range of 13.34c/lb for over 7 months and we now can’t rule out a test of this higher level before the end of May when the 22/23 season finishes. There could still be some wild moves into expiry of the N23 contract within the aforementioned range and 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!
*Please note that we only share CFTC CTO on weekend reports.
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