Increasing arrival of imported cotton, with more arriving in the coming months, has reduced the market share of domestic crop in Chinese market. Cash flow restraints and difficulties in expanding export market for textile products are denying a bulk purchase by spinning mills. The marketing of domestic cotton still faces difficulties. Domestic prices will be more responsive to NYK futures and chances are very small for domestic price to rally. And if there is a rally, it wont be significant. However, it remains to be seen whether domestic price is going to fall.
Weaker confidence over longer-term market and higher costs caused many merchants to make aggressive offers. For the month, T328 averaged 14312 yuan per ton, down 92 from February. Despite the decline, however, mills continued their piecemeal purchase. Mills with poor sales record committed account purchase in order to ease their financial restraint.
Mills focused their purchase on foreign cotton and Xinjiang crop in March. Very limited offtake was reported for domestic cotton. One spinner in Shandong province purchased 3000 tons before the Spring Festival. Current stock level has exceeded one month. Another survey by CNCotton shows 75% of the spinners has increased the use of foreign cotton. The share of Imported cotton in cotton blending is also evidence.
ZCE and CNCE prices have come to a very crucial point. Gross price level for MA contracts dropped to 14500 yuan per ton in early March and have been consolidating since then. This level is the highest record in 2004/05 and MA trading prices have been above it since 2005/06. Whether it is going to be a major support still remain to be seen and may have profound influence on the market psychology.
Domestic prices are greatly influenced by Xinjiang crop and imported cotton in March. This pattern is not expected to change in the near term. The amount of imported arrivals will remain at a very high level in the coming months. March import figure may be well above Jan and Feb. Further, by the end of March, 50% of Xinjiang crop remain to be sold. Near term supply is pretty abundant. As a result, domestic merchants have no other choice but to make even aggressive offers. Domestic prices are under great pressure.
On the demand side, textile export figures are far from satisfactory. Jan-Feb textile and apparel export totaled 19 bil USD, up 14.62%, a rather low record in months and also down 9.07% in year on year growth rate. Accelerated appreciation of RMB also undermined textile exports.
World cotton prices may receive some support from physical market but the influence of fund sector can not be ignored. Currently, any decline of NYK futures price will boost moderate purchases and U.S. export sales are ahead of USDA projections. Thus, world cotton price has found good support.
The fundamental pattern (supply/demand) is pointing a weak domestic price. The stablization of world price and a steady price spread between imported cotton and domestic price will be supportive to domestic prices. Further declines may therefore slow down. However, any downward breakthrough by NYK futures will be a blow to domestic prices.
Mils are expected to extend coverage before May Day Holiday. Yuan appreciation will also help. However, Chinese merchants have less choices in reducing market risks.
