【Wdoodoo Cotton Weekly Report】Downstream production and sales have improved; focus on going long on pullbacks

Last week, Zhengzhou cotton prices surged and then retreated. The CF05 contract closed at 15,410 yuan/ton, up 120 yuan/ton from the previous period. Cotton 3128B closed at 16,590 yuan/ton, up 190 yuan/ton from the previous period. Market sentiment was pressured by rumors of additional sliding-scale tariff quotas in the short term. However, supported by improving peak-season demand and favorable planting policies, cotton maintained a volatile but bullish trend.

1.The situation in the Middle East is spiraling out of control, pushing up overall energy and chemical costs.

The Middle East situation is evolving toward prolonged confrontation and periodic escalation of tensions, which continues to impact crude oil production and transportation in the Persian Gulf. Due to the repricing of war risk insurance and the time lag in restoring shipping order, costs of energy and chemical products are expected to remain elevated for a longer period. The conflict has so far had limited impact on China’s cotton fundamentals. In the short term, rising chemical fiber prices have supported cotton as a competing product. However, a prolonged conflict could weigh on China’s clothing exports to Europe.

2.Short-term import pressure is increasing, but expectations of reduced planting will support cotton prices in the long run.

In its March global supply and demand forecast report, the USDA raised production estimates for China and Brazil. Global ending stocks were increased by 278,000 tons month-on-month, making the report slightly bearish.The spot price spread between domestic and foreign cotton has been widening amid volatility, further opening the window for cotton imports under the 40% tariff rate. Market rumors suggest that the National Development and Reform Commission may issue 300,000 tons of cotton import sliding-scale tariff quotas for processing trade. The expansion of effective domestic supply will cap the upside of Zhengzhou cotton prices in the short term.

Nevertheless, in the medium to long term, consumption growth will be notable amid capacity expansion of Xinjiang spinning mills. A reduction in Xinjiang’s cotton planting area for the new marketing year is highly certain, and favorable policies are unlikely to be disproven before the sowing season. Expectations of tighter supply in the new year are expected to underpin cotton prices over the long term.

3.Downstream performance is strong, and spinning enterprises are buying cotton on dips.

Entering March, downstream production and sales have rebounded significantly. Operating rates of yarn and grey fabric production have risen sharply. Cotton inventories at spinning mills, yarn inventories at weaving mills, and grey fabric inventories have all dropped substantially month-on-month.

The inventory-to-sales ratio of textiles and apparel in the United States has continued to decline. Coupled with the reduction in China-US tariffs, restocking demand has gradually emerged, driving strong exports of China’s textiles and apparel. From January to February, China’s textile and apparel exports reached 50.446 billion US dollars, up 17.65% year-on-year.

However, spinning mills built up relatively high cotton inventories before the Spring Festival. After the holiday, buying interest in cotton raw materials has been muted amid high prices, with most purchases made on dips.

Overall, the USDA report is slightly bearish. High domestic-foreign cotton price spreads and rumors of additional sliding-scale tariff quotas are weighing on the market in the short term. However, supported by markedly improving peak-season demand and favorable planting policies, cotton is expected to maintain a volatile but bullish trend. Zhengzhou cotton is forecast to consolidate high between 15,000 and 15,800 yuan/ton. Long positions may be reduced appropriately on rallies, while a bullish approach on pullbacks remains appropriate for the medium to long term.

Key focuses this week:

        The persistence of geopolitical conflicts in the Middle East;

        Policies on Xinjiang cotton planting area for the new marketing year;

        End-use demand performance.