Cotton prices will come under pressure as demand weakens and the economy slows

As demand slows amid a slowdown in the global economy, world cotton prices will come under pressure, experts say.

“There is no demand for yarn from spinning mills. They lose about -40 30-40 kg from yarn sales. But their stocks are limited. That stops the price from falling at the rate it should be, “said Anand Popat, a Rajkot-based trader in raw cotton, yarn and cotton waste.

“The higher level of inventory with worldwide retail sales in the face of slowing demand has created a slow trend throughout the value chain in textile production,” said Prabhu Dhamodharan, head of the Federation of Indian Manufacturers (ITF).

11-year peak

U.S.-based research agency Fitch Solutions Country Risk and Industry Research (FSCRIR) said it believes global cotton prices have peaked as “demand begins to weaken amid a slowing global economy with growing risks as set increased plantations and better time for the next season to increase production.

It says cotton futures for the second month of the Intercontinental Exchange (ICE), New York, rose from 111 cents per pound earlier this year to a peak of 155 cents on May 4 – the highest since 2011. ., when prices reached 203 cents. Currently, prices are around 125 cents. Fitch Solutions said it expects more weakness in the coming months, especially in terms of increased production in India, the United States, China, Pakistan and Brazil, with the harvest season starting in August.

ICE cotton futures for July delivery are currently quoted at 143.45 cents (700 87,700 for 356 kg candy), while cotton is available in cash at 134.14 cents (000 82,000). October and December futures are quoted at 125.14 and 118.29 cents, respectively.

At the Zhengzhou Stock Exchange, cotton for July delivery was quoted at 19,510 Chinese yuan per tonne (83,125 rupees per candy), while September futures were 19,555 yuan and November futures at 19,285 yuan, respectively.

There are no buyers, sellers

In contrast, Indian cotton Shankar-6, the export benchmark, is valued at around Rs 95,000.

“There are no buyers or sellers at these prices,” Popat said.

Usually the prices of Chinese cotton are higher than the prices of Indian cotton. But now they rule lower than the Indian price. This is a fair indication of how things will develop over the next few months, said the Rajkot-based trader.

“We expect 3-4 months of contraction in demand, which will only lead to a reduction in prices and then trade will return to routine business with depletion of stocks. We need to work in a normalized search environment like the period before Covid in the coming quarters, “said Damodaran of the ITF.

Bull effect

FSCRIR said the rising price of cotton has boosted producers’ confidence, leading to higher cultivation worldwide. In China, government initiatives will also give confidence to producers.

“We are confident that cotton prices will adjust to normal levels in the upcoming cotton season,” Dhamodaran said.

Popat said the 25-cent difference between July and December futures was high and prices could rise to 120 cents from December.

Dhamodharan said: “Even a 10-15% drop in demand and 15-20% higher production, which is very possible, could create a bullish effect and bring cotton prices down to nominal levels in the upcoming cotton season.

Sales on call

Another factor that could affect prices is that nearly 121,015 US cotton bales, equivalent to 1.61 lakh Indian cotton bales, were sold by traders in short positions. Characteristic of “on-call sales” is that the buyer buys cotton from a seller or speculator without fixing the price, and buyers usually look to settle the contract when prices are low.

Meanwhile, 9.5 lakh tons of cotton have been imported so far. The center allowed duty-free cotton imports until September 30 to help the industry get quality cotton and solve supply problems.

Imports were also allowed to cool domestic prices, which exceeded a record ₹ 1,000,000 candies in May this year. In particular, the textile industry complained about a shortage of quality cotton.

The quality of Indian cotton was affected by off-season rains in October-November last year. The rains also reduced production from 360.13 lakh bales in October to 315.32 lakh bales from the Cotton Association of India.

Cotton prices have risen to an 11-year high this year due to lower world production and higher demand this year. But the war between Russia and Ukraine and the resulting inflation over energy prices have slashed demand and the textile sector’s prospects.

Posted on

June 20, 2022

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