COTTON NEWSLETTER 0.3
The cotton market has been extremely volatile in the last couple of weeks. NY
Cotton futures hit a 52 week low of 83 cents/lb on 14th July. December
contract has fallen by almost 50 cents from its all time high of 133 cents/lb on
17th May. Overall, prices have fallen by 45% from all time high of 155 cents/lb
as it transitioned from the old crop(July contract) to new crop (December
contract)
The latest CFTC report showed that the spec/hedge funds have reduced their
net long position significantly. They are unlikely to return for the time being.
We are in a completely risk off environment as all global commodities have
been witnessing massive sell off.
Federal Reserve has been quite vocal about its commitment to raise interest
rates as high as needed to control inflation. Rising interest rates and a rising
dollar is putting significant pressure on commodity prices. The big jump in CPI
in the US (9.1% compared to last year) has been the hottest monthly reading
since 1981. This has led to speculation that the Fed might raise the rates by
100 bps in its next meeting on July 26.
Indian cotton prices too have witnessed a sharp correction, however not as
massive as the NY futures. J-34 quality cotton (Hanumangarh Station) is
currently trading at Rs. 8900 per mound (down by almost 25% from its all time
high of Rs.12000 per mound). Shankar -6 (Gujarat quality cotton) is trading in
the range of Rs. 86000-89000 per candy.
Lack of supply in the physical market continues to provide support to the
prices. Very limited trades are happening in the market because of lack of
supply and weak demand. Forward agreements between merchants and mills
are happening in the range of Rs. 65000-75000 per candy for November and
December delivery.
The Chinese government has announced a stimulus of 200 bln$ to support
their economy. Chinese government will also be filling their cotton reserves
and they will be looking to buy 3-5 lakh tonnes of cotton to fill their reserves.
This, we believe, should provide some support to the market.
Yarn market continues to witness weak demand due to a slowdown in global
consumption and anticipation of a further fall in prices. Yarn Prices in
Bangladesh have crashed more than 35%. Some of the mills in Bangladesh
have also refused to open LCs for the raw cotton ordered few weeks back at
150-160 cents/lb landed price.
In a first, we have seen some textile mills in India selling their cotton inventory
because of weak demand of yarn and losses in manufacturing yarn at current
prices of cotton. Mills are currently operating at an EBITDA loss anywhere
between 5 – 15%. Most of the spinning mills are running much below their
peak capacity in order to reduce their losses. We see the situation normalizing
for the textile companies by the end of calendar year. Until then, they will have
to bear the brunt of negative spreads.
Monsoon in India has been delayed by a couple of weeks. Market participants
believe that the new Indian crop should be 15-20% higher than last year.
Excess rainfall can also cause damage to the crop which was seen last year. We
don’t expect the crop to be more than 10% higher than the last year. It will be
interesting to see how the monsoon behaves.
Indian cotton prices usually trade at a discount to international prices.
However, for the last 6-8 months, it has been trading at a hefty premium
(>25%) to the international prices. If the drought situation persists in Texas and
we have a poor crop in US, then it is possible that Indian Cotton price premium
may sustain. This shall make Indian Textile sector less competitive in the global
markets. It has already started getting reflected in the order books of the
Indian fabric manufacturers.
Where to from here?
We continue to believe that lack of supply in the physical market will act as a
cushion for Indian cotton prices and it is unlikely to fall materially until the new
crop arrives by mid September.
