Chinese cotton price started to hike at the end of Aug. Now the prices are still on the uptrend and many people are concerned about the future development. However, with the prices staying high, risks also mount. We will firstly analyze the reasons supportive.

Supply and demand situation




USDA's Oct report estimated China's 2010/11 output at 6900KT, down only 100KT from the 2009/10 output. However, according to China Cotton Association's Sep report, the output was only 6640KT, down about 160KT from the 2009/10 output. Whatever, the output will reduce in China, which was one of the big reasons for the continuous price hikes.

Unlike China, the US cotton output increased greatly in 2010/11 season. According to USDA's Oct report, the output is expected to be at 4100KT, up 1400KT or 51.9% from 2009/10 season. Despite growing demand, China’s shortage may be fulfilled by the increase in US.

Supply tightness particularly in China drove up global cotton prices recently, but looking into the whole situation, we still think the supply and demand could meet the balance for the season.

Risks
1. The fragile industry chain.
Now the trading volume in cotton textile industry has shrunk greatly. Cotton enterprises dared not to accept big orders in face of the great price fluctuations.

2. RMB appreciation.
Since early Sep, RMB has appreciated 2.4%, a big pressure for textile industry with export dependence at around 40% and average export profit at around 3%.

3. India cotton export.
India decided to permit cotton export registration from Oct 1 and allow shipments from Nov 1. By Oct 10, 1331 applications were submitted, the quantitative cap of 5,500,000 bales had been reached. This will relieve global supply tightness to some extent.

4. Power regulation
Now Gov is strict with “production cutback, power saving” plan. This will affect the production of textile mills to some extent.

Conclusions
Although supported by the supply/ demand situation, cotton market now is witnessing more and more risks. Any adjustment may be possible along with the shrinking trade volumes for cotton textile products, slacker export performance and exports of India cotton.

source:CCFGroup.com