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Insight | Time:Jun 26 2018 3:20PM
Cotton yarn keeps firm amid weakening market sentiment in Jun
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The downtrend dominates cotton and related markets in Jun. Futures market almost comes back to the level before May 16 when the cotton futures had not surged after slumping twice. By Jun 25, ZCE cotton futures contracts for Sep delivery moved down by 1,840yuan/mt and cotton yarn futures for Oct delivery down by 1,845yuan/mt. Thus how much does the slump of futures market impact cotton yarn?

1. Sale of cotton yarn slow down.

From above chart, it can be seen that cotton fabric inventory stopped falling in May. With further slack season in Jun and downward price, orders to weavers reduce obviously and inventory climbs up, contributing the most to slow sale of cotton yarn. In mid-Jun, home textile market improved and orders to cotton fabric plants hiked some of which even had to be scheduled in advance. Therefore, downstream continued purchasing cotton yarn despite declining prices on cotton yarn spot and futures markets and they procured less each time but more frequently. That is to say, what affects procurement of weavers mostly is orders, while price has more impacts on traders’ procurement.

2. Cotton yarn price does not fall sharply.

Price change of cotton and cotton yarn
 Yuan/mt ZCE cotton futures Cotton type 3128 CY C32
1-Jun 18625 16850 24330
15-Jun 17430 16800 24230
Price change -1195 -50 -100
15-Jun 17430 16800 24230
22-Jun 16800 16600 24170
Price change -630 -200 -60

The slump of ZCE cotton futures is not reflected obviously in spot market and cumulative decrement of cotton yarn is less than that of cotton. Currently inventory of cotton yarn mills remains low and some mills with high-quality cotton yarn are still arranging orders. On the other hand, cotton price also does not plunge and cotton yarn increment was lower than cotton during the rising period of cotton.

3. Cotton yarn mills do not cut cotton procurement largely.

Generally speaking, when cotton price moves downward, cotton yarn mills will retard purchasing cotton. However, cotton yarn inventory in spinners drops somewhat while cotton inventory only dips slightly as the market participants predict tight supply of domestic cotton and hold bullish anticipation to later cotton market. At present, cotton yarn mills think that cotton has large potential to rise later, especially quality one. 

In terms of later market, inventory accumulation will put pressure on price amid slack season in short run, but the price will not decrease sharply. Market participants concern about China-US trade war. Even if the textile and apparel are not levied, the intensifying trade conflict will influence the trend of macro-economy and thus impact downstream consumption. Continuous attention is suggested to the market.
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