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Insight | Time:Oct 19 2017 10:24AM
How about 2017/18 Chinese cotton market?
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Key note: 2017/18 seed cotton begins to arrive on the market successively and getting momentum currently, while cotton seed prices present weakness, leading to high cotton costs. However, social stocks of cotton maintain high, and mills show low buying interests. Supply is in a glut overall. For late market, Chinese cotton prices may move lower in correction under the high costs and the unbalanced supply and demand pattern.

I. Seed cotton procurement
In Sep, picking has kicked off successively in the major cotton producing areas nationwide, and ginning factories also started to procure seed cotton and process. In inland, the procurement and ginning activities were stated in early Sep, while in Xinjiang, it delayed somewhat affected by lower temperature and rainfall, and the intensive harvests were seen around Sep 20.
Seed cotton prices in mid-Oct
Regions Picking method Seed cotton (yuan/kg) Monthly change Ginning yield Cotton seed (yuan/kg) theoretical cost
Xinjiang XPCC Machine-picked 6.4 -0.4 37% 1.55 15258
North Xinjiang Machine-picked 6.2 -0.6 36% 1.55 15467
Hand-picked 7 -0.4 40% 1.55 16175
South Xinjiang Hand-picked 7.4 0.1 40% 1.68 16980
Inland Hebei Hand-picked 7.1 0.2 40% 2.1 15200
Shandong Hand-picked 7.1 0.3 40% 2.1 15200
Hubei Hand-picked 6.8 0.3 39% 2.1 14751
Hunan Hand-picked 6.9 0.4 38% 2.2 15168
Anhui Hand-picked 6.6 0.2 38% 2 14705
Jiangxi Hand-picked 6.4 0.2 37% 2 14492

In inland, the largest cotton producing areas are Hebei and Shandong. In early Sep, seed cotton prices scored at 6.80-7.00yuan/kg, later, rose by 0.20yuan/kg to 7.00-7.20yuan/kg, higher to 7.40yuan/kg for better quality. The ginning yield and quality is better compared to last year.

For the most important cotton area in China, Xinjiang, the seed cotton prices in North Xinjiang were high first and then moved lower. In 2017, seed cotton is mainly machine-picked in North Xinjiang, and prices in the early picking period reached 6.80yuan/kg (with ginning yield of 36%), but prices dipped to 6.20yuan/kg around National Day holiday due to intensive arrivals of new cotton and ginning activities. Moreover, cotton seed prices reduced from 1.93yuan/kg to 1.55yuan/kg, so ginning activities adjusted lower their buying indication.

In South Xinjiang, the harvests was slower this year affected by the labor shortage. The labor costs were about 2.50-2.70yuan/kg, an increase of 10-20% year on year, improving the hand-picked cotton costs. Therefore, hand-picked seed cotton prices stayed firm at 7.40yuan/kg, and as cotton seed prices were about 1.68yuan/kg, ginning costs to lint were around 17,000yuan/mt, higher about 1,500yuan/mt than that of machine-picked cotton in North Xinjiang, also much higher than the cotton costs last season.

II. Ginning and sales of new cotton
In mid-Sep, new cotton was sold at 15,300-15,500yuan/mt in Hebei and Shandong, with favorable sales and considerable profits. Later, with the upswing of seed cotton prices, costs rose and selling prices of new cotton stabilized at 15,300-15,500yuan/mt, so profits reduced by 100-200yuan/mt mostly. Compared to the corresponding period of last season, selling prices had no big change in inland.

However, selling prices were higher than last season in Xinjiang. Currently, North Xinjiang-origin machine-picked cotton prices approached 15,800-16,000yuan/mt gross weight, higher than last season’s 15,300-15,500yuan/mt. In South Xinjiang, hand-picked cotton prices reached 16,800-17,000yuan/mt, higher about 300-500yuan/mt year on year. Recently, trading activities of North Xinjiang-origin machine-picked cotton were obviously better than that of South Xinjiang-origin hand-picked cotton. In terms of profits for ginning factories, machine-picked cotton from North Xinjiang was higher than hand-picked cotton from South Xinjiang. In 2017/18 season, ginning costs witness large spread between the two cotton in Xinjiang, and management risks of hand-picked cotton are high.

III. Downstream demand analysis
The state cotton auction has ended on Sep 29 and only spinners were allowed to take part in the auction during Sep 4-29. Mills were active to purchase reserved cotton at auctions and cotton inventory climbed up obviously, to last above 40 days. Currently, mills have no plan to purchase large quantity of new cotton, but some mills and traders book the quality cotton in advance.

In end Sep, social stocks of cotton totaled 2.21 million tons, up significantly compared to the corresponding period of previous years, so mills are expected to delay to procure new cotton this year.

IV. Conclusion
Cotton seed prices maintain weak, leading to high cotton costs and high selling prices of new cotton. Cotton inventory in spinning mills is high and mills show low buying interests for new cotton under the oversupplied condition. Cotton seed prices are hard to rise obviously affected by sluggish demand from downstream sectors and environment protection regulation, weighing on the ginning activities of new cotton. In general, Chinese cotton prices are likely to move lower in correction later under the high costs and the unbalanced supply and demand pattern. 
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