Analysis: What Is The Impact Of Consumption And Import On Cotton Prices?

Compared with last year, although cotton prices are at a low level, there are few changes in fundamentals. The output is basically flat or slightly fluctuating from last year. The State Reserve ship has dropped to a relatively low level on schedule, and cotton fundamentals are still improving as a whole. However, some factors have changed compared with the previous year, which is mainly due to changes in market expectations of consumption and imports.

The strong growth of cotton consumption has been one of the main factors supporting cotton prices in recent years. But after entering 2018/19, the trade frictions between China and the United States and the downward pressure of macro-economy have changed the expectation of consumption in the market. It is estimated that cotton consumption this year is likely to change from the high growth trend that began in 2015/16 year to the downward trend.

Indeed, since the beginning of 2018, the retail sales of textile and clothing have shown a continuous downward trend. When the impact of Sino US trade friction began to reflect reality, 11-12 months of textile and clothing export sales also showed a marked decline last year. Internal and external troubles exploded the market's anticipation of future cotton consumption.

The impact of macroeconomic and trade frictions on consumption is obvious, but the downturn in consumption caused by economic downturns should be slow. In contrast, the impact of trade frictions will be more rapid and direct, especially when market sentiment is generally pessimistic.

Although China's exports of textiles and clothing to the United States are indeed large, the proportion of the total exports and domestic sales is still limited. And from the consensus reached at the end of last year at the G20 summit to the preliminary consultation at the beginning of this month and then to the end of the month, all the Sino US economic and trade relations are going to be a good trend.

Moreover, despite the rapid development of textile and garment industry in Southeast Asia in recent years, China still has an irreplaceable competitiveness in the industry regardless of its volume and cost. That is to say, even if the trade frictions continue, the reconfiguration of industrial resources in the world also needs time.

Therefore, consumption in 2018/19 is likely to decline, but there is limited room for decline.

Another factor that is expected to change is imports, because our country implements an import quota system for cotton. So in recent years, cotton imports in China have remained stable at 1 million tons. However, the reduction of the 800 thousand tons sliding quota and sliding tax rate last year to maintain stable cotton prices led to a 1 million 600 thousand tonnes of cotton import forecast for the current year.

In the context of declining consumption, a significant increase in cotton imports will largely reduce the gap between supply and demand of core elements of cotton prices.

In the context of the normalization of cotton production and marketing gap and the continuous decline of State Reserve inventories, the increase of cotton imports is inevitable.

However, the increase in import quotas this year is a response to specific circumstances, especially when the stock of cotton is still relatively adequate and new cotton is beginning to be listed in large quantities, which makes the supply pressure of short-term cotton further expanded.

But combined with global supply and demand, the supply pressure of imports may only stay above expectations.

The global cotton supply situation in 2018/19 is not very good. First of all, the United States, and not to mention the tariff problem caused by trade friction, has a significant decline in cotton production and quality due to its own weather. Moreover, despite the lack of data from the US Department of agriculture, India has reduced its cotton production to less than 5 million 700 thousand tons this year, and because of its good inventory and MSP support, India's cotton price has continued to operate at a high level. In addition, due to drought, the market's prediction of Australia's cotton output has also been adjusted to around 500 thousand tons. The increase in cotton production in Brazil may be an important supplement to the global cotton supply this year, but its cotton exports this year are nearing its end.

Therefore, in view of the worldwide availability of cotton resources, despite the increase in domestic cotton import quotas, there is still much doubt about the implementation of cotton procurement.

On the whole, the decline of cotton consumption under the pressure of domestic demand and foreign trade is an objective fact, but its amplitude is still controllable, and the easing of trade frictions is further narrowing its declining range. On the other hand, the increase in imports is also a trend. But according to the demand and supply of cotton, the increase of density inside and outside cotton is likely to become another strong support for its price.

In addition, the existing industrial and commercial inventories and warehouse receipts pressure is also more phased. Combined with the whole year's cotton supply and demand situation, cotton is still going to inventory logic, while the continuous decline of state reserve inventory gives cotton prices more room for change.

Therefore, short term cotton prices may still be a low-level arrangement dominated by stage supply pressure and pessimistic consumer expectations, but as trade problems fade, market sentiment improves and orders resume, cotton prices are expected to return to their normal supply and demand logic, that is, the price center of gravity should be shifted upward. New cotton planting, weather conditions, state reserve policy, structural supply and other factors may also become a new driving force.