- Jo Earlam
- September 18, 2022
- 8:00 pm
- 10 min read
Demand woes for Cotton take centre stage
It always seems impossible until it's done.
CTZ22 99.29 (-4.00)
CTH23 96.15 (-4.00)
CTK23 93.90 (-3.98)
CTN23 90.98 (-3.86)
CTZ23 80.92 (-1.94)
Zhengzhou CF301 – 14,755 (+45)
Cotlook “A” Index – 121.75 (+0.50)
Daily volume – 19,608
AWP – 95.17
Open interest – 209,867
Certificated stock – 4,552
Z22/H23 spread – (+3.14)
Z22/Z23 spread – (+18.37)
December Options Expiry – 11th November 2022
December 1st Notice Day – 23rd November 2022
Introduction
• Prices tried to move higher in the last week only to fail and finish with a limit down move in Friday’s trade. For the record, Z22 traded in an 881 point range between 99.29 and 108.10 before closing the week down 555 points. Futures volume averaged just 20,866 futures whilst options were very active averaging 8,843 daily, with calls outnumbering puts by nearly 2 to 1!
• It would be fair to say much of the recent volatile price action is down to some rather bizarre USDA reporting (August and September WASDE’s in particular) or lack of it when it comes to USA exports or addressing the true consumption in the world! Algorithmic models that are programmed to buy or sell based on USDA reports have caused massive price fluctuations over this last summer, not aided by the fact this is a period when there is a lack of liquidity in the market!
• As a result, many in the trade are extremely sceptical of the stuff churned out by the supposed wise folk at the USDA…ourselves included! Algo trading models that only consider this information cannot perform well if what is being published is wrong or, in the case of consumption, not even considered, but has to eventually be addressed long after the event!
• The CFTC COT report showed that funds were once again sellers in the week ending last Tuesday. Managed Money (MM) were net sellers of 1,976 contracts as were Other and Non Reportables who sold 770 and 547 contracts each. Between MM, OR and NR their net long is now down to 52,500 contracts or 5.25mb.
• This long position is a concern, noting it is a heavily losing one, probably procured at an average price (we guesstimate) at around 113/114c/lb. The market has now shown its hand and the move lower will likely continue a bit longer, fuelled by further fund liquidation now that we have broken the 101.19 low from the previous week!
• In our weekend report 2 weeks ago when Z22 closed at 104.84 we stated the following…”If pushed to make a prediction, we believe that prices will continue to struggle and suggest that we can go as low as 90c/lb on this move, whereupon end user buying will likely resurface, and/or Z22 “on call” fixations will occur. By then, MM will have got out of what they need to and guesstimate a 88c/lb to possibly 108c/lb trading range into Z22 expiry”
• We maintain this belief, noting Z22 went to the top end of our range at 108.10 on Monday only to collapse to under 100c/lb by week’s end. EAP doubt we will see 108.10 breached for the rest of the 22/23 season!
• A look at the chart of Z22 below shows a clear break of previous support and a probable test of 96.69 and below that just above 90c. One or both of these targets is expected in the days and weeks ahead.
• In India, a speech at the Jalgaon conference by the president amplified the demand destruction seen in their market. Cheap Viscose and PSF is the main competitor to Cotton yarn and expensive arrivals of foreign Cotton into the market with banks more than conscious of the situation faced by mills is causing many to question when the fortunes for Cotton will turn around?
• A field trip to Turkey by one of our closest friends in the business over the last week revealed the extent of the problems being faced by their mills at the present time. As many as 60 to 70 mills in Turkey are totally closed with the rest operating at 25-50% capacity. There are no European orders for yarn and there has not been for 2 months!
• What is more alarming is the Turkish crop is thought to be more than 1.0m mt! Late shipped arrivals of very high priced imported Cotton into the Turkish market are exacerbating the problem. Merchants hoping for the Turkish market to act as a reprieve for new sales are going to be rather disappointed! Why would a Turkish spinner buy foreign cotton when his own crop is in plentiful supply and looking for a home? Moreover, the Turkish basis is about even Z22 ex gin and is sure to be one of the most competitive foreign cottons in the wider world market as the crop looks for a home.
• Merchant basis offering levels in the mid 20’s on Z22 for an assortment of growths look vastly overvalued to EAP and if demand remains dire and freight rates continue to drop, then we can also expect merchants to slash the basis for all foreign growths as they search for sales as the Northern hemisphere crops come in. None of this will be helped by a surging USA dollar index!
• Our good ginner friends in Greece are starting to defoliate where the weather remains excellent. Recent reports suggest a 320-330k mt crop with about 25-30% already sold. Egypt is probably paying the best prices but their basis has certainly weakened in the last week and we have heard of sales at 1350 ex gin on Z22 from 1450 -1500 a week ago. With Turkish demand non existent, it would be fair to suggest that this basis has only got one way to go as harvest pressure increases!
• Last week we highlighted the woes for the share prices of Weiqao and Texhong being two giants of the cotton spinning industry! It is always important to have some alternative perspective so we have taken a look at one of the more niche smaller players in the European spinning industry.
• Nafpaktos Yarns in Greece is a second generation spinning mill that was restarted following having to close down in the early 2000’s when the Euro rate went to its highs against the US$ back in 2008. With the Euro collapsing versus US$, it is perhaps not surprising to see this company’s fortunes take a turn for the better, able to compete when it simply could not back in 2008.
• A brand new spinning mill is perhaps a brave move in the face of weakening demand, but nonetheless the share price is up 8x since falling to a low of just 13c about 6 years ago and the chart speaks for itself!
Conclusion
EAP believe that any rallies in the Cotton market, up to the 200 day moving average at 105.80 should be sold. We would be surprised to see Z22 exceed last week’s high at 108.10 for the rest of this season. Longer term, EAP remain of the belief that the 22/23 season will prove to be an inverted one, with the final low at the end of the season. Scale up selling into any strength over the coming days will likely prove to be prudent.
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Written by:
Jo Earlam
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