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Insight | Time: Jul 10 2019 3:37PM
Cotton yarn market weakens again upon plummeted ZCE cotton futures
 
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ZCE cotton futures hit limit down again yesterday, beyond expectation. Amid the slump, cotton yarn sales weaken again, but the offers have not moved down yet. The market now is covered with heavy look-on mood.

1. Weakening signs of cotton yarn sales have shown up since last weekends.
In fact, the weakness of cotton yarn market is not attributed to yesterday’s slump of ZCE cotton futures. Favored by the restart of China-US negotiation on trade war, ZCE cotton futures soared last Monday, then cotton yarn sales improved immediately, yet centered on conventional carded ones rather than combed ones and high-count ones, which indicated that the improvement of cotton yarn sales mainly came from the speculative restocking of downstream weavers or traders upon the expectation of better orders and higher price later. However, in fact the support from rigid demand was soft. Downstream market also proved that through scarce new orders, high inventory hardly to be consumed and price dropping instead of rising. Then trading of cotton yarn started to soften, more obviously this Monday. 

In conclusion, the previous improvement of cotton yarn market was owing to speculative restocking of downstream players upon expectation on better orders, rather than the procurement for rigid demand brought by actual orders. After a week-long verification, they found that the orders did not improve, and then reduced or stopped purchasing.



2. Cotton yarn prices stay stable temporarily with some down.
Cotton yarn prices stay flat on the whole despite the slump of ZCE cotton futures. Currently cotton yarn mills prefer to stand on the sidelines.

What’s the reason behind limited decline of cotton yarn upon slump of cotton?

Firstly, when cotton price moved up previously, cotton yarn did not follow up. According to CCFGroup, cotton market rebounded from mid-Jun, but cotton yarn stayed in downtrend until last week when some conventional carded ones partly climbed up with most varieties stable, and cotton yarn mills reduced discounts. No ups, so no downs.

Secondly, the inventory was effectively consumed after the sales of conventional cotton yarn turned better last week and currently it does not have high pressure except combed ones and high-count ones.

Thirdly, the profits of cotton yarn have not recovered. At present, cotton yarn mills using state reserved cotton can obtain thin profits or achieve breakeven at least. But the volume of state reserved cotton is not large and cotton yarn mills use limitedly. At present, most spinners are at a huge loss. For example, the loss of carded 32S reaches about 500yuan/mt. With thin profits, cotton yarn mills are reluctant to lower offers.

The major contradiction on the market is still concentrated on the weak end-user demand and high inventory pressure. If the inventory pressure on downstream players does not alleviate, the upstream will be hard to rebound. The decline of ZCE cotton futures is in expectation, but the limit down is beyond expectation indeed. Cotton yarn price is likely to weaken again later upon bearish cotton, especially combed ones and high-count ones, but it may not decline much.
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