CTZ23 79.03 (+1.67)
CTH24 79.04 (+1.49)
CTK24 79.19 (+1.37)
CTN24 79.30 (+1.25)
CTZ24 77.18 (+0.77)
Zhengzhou WQU23 – 16,310 (+15)
Cotlook “A” Index – 88.70 (-0.80) – 28th June
Daily volume – 24,916
AWP – 65.50
Open interest – 175,531
Certificated stock – 17,051
Z23/H24 spread – (-0.01)
H24/K24 spread – (-0.15)
K24/N24 spread – (-0.11)
December Options Expiry – 10th November 2023
December 1st Notice Day – 24th November 2023
Introduction
– The market found some strength today which may bring a measure of comfort to bulls who have been feeling nervous since we broke through the 80 cent level to the downside. The lead month Z23 closed at 79.03 usc/lb, up 167 pts for the day. Nevertheless, with demand remaining hard to find, we believe any move higher is likely to prove short lived.
– The Cotton Outlook A-Index has dropped below 90 usc/lb for the first time since 1st June 2021. If we take a look at the chart above, is there a suggestion perhaps that we are returning to more “normal” pricing for cotton???
– There are a number of rumours circulating in China with regards to a forthcoming release of Reserve stocks or import quotas. These rumours have even been reported in international news wires. We should stress that these remain rumours for now with nothing firm behind them. On a pragmatic level, China does not seem to need more cotton at this time, though. if the new crop is as low as some of the wilder claims (it is far too early to be this bold!), additional supply may be required at some point. However, it should also be noted that political motivations may come into play and it is a long favoured tactic of the NDRC to float rumours in the market before deciding on a course of action.
– For now, based on fundamentals we would expect China to maintain the status quo, though we would not rule out a release of quota or reserves on a political basis. Having said that, if this were to occur, we would expect it to be on a relatively small scale.
– The bullish move in CZCE can be said to have started at the end of March (or perhaps even last November), though the latest leg began on 1st June when the market broke sharply higher, through the 16,000 RMB/MT level and reached a high of 17,070 RMB/MT three days later. Over the last ten days CZCE has ground lower, closing today at 16,310 RMB/MT and we would not be greatly surprised to see us back below 16,000 RMB/MT before too long.
– The cash market lagged futures somewhat, but followed higher to trade around 17,500 RMB/MT. On the way down, the cash market has again been the follower rather than the leader, but prices have now fallen to around 17,000 RMB/MT and, given that yarn prices did not move up to anything like the extent of cotton prices (as we commented in last Thursday’s report), it would seem to have further to go!
– The below charts show retail sales in China for both the Urban and Rural markets which show both running well below trend and putting in a much weaker post-reopening recovery than would be expected. This echoes worrying trends in retail sales in Europe and, to a lesser extent, the US which we have commented on in previous reports.
– As the CFTC cotton on call report was based on positions as of 23rd June, i.e. prior to N23 FND, it contained a small old crop position, but with FND now passed, we can ignore this and focus on current crop (Z23 to N24). The net on call sales position stands at 17,104 contracts, the 20th highest for this week of the year out of the 23 years on record. Notably, the total on call purchases stood at 37,482 contracts, the second highest for this week off the year!!
– The USDA export sales report showed good overall numbers split over the two years. Current crop sales of 125,600 bales were dominated by China once again with 77,400 bales sold – good luck to the shipping team there!! Whilst new crop sales of 158,700 bales were primarily to Central America – 72,200 bales for El Salvador and 30,800 bales for Honduras. Exports of 225,200 bales were below the pace needed to reach the USDA target for the season.
Conclusion
Our efforts remain solely on new crop Z23 which has traded between 77.56 and 86.98 so far this calendar year. 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!
Useful links
*Please note that we only share CFTC CTO on weekend reports.
Written by:
Jo Earlam
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