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Appreciation of Chinese Yuan restores profits of imported cotton yarn traders

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 The exchange rate of onshore Chinese Yuan against USD surged by 1.5% last week, hitting new high since Jul 2018. As a consequence, profit of imported cotton yarn recovered accordingly, which can be seen from the profit trend of imported Indian carded 32S, Vietnamese carded 32S and Pakistani siro-spun carded 10S in the past one year.

Indian cotton yarn suffered huge losses amid hiking cost caused by sudden surge of cotton price and sharp depreciation of Chinese Yuan in 2018. Since Jan 2019, as forward imported cotton yarn price declined and Chinese Yuan appreciated, profit of imported Indian carded 32S recovered gradually. Currently, the cost of new arrivals of Indian cotton yarn reached 22,500yuan, with losses of 200-400yuan/mt. It is likely to lose less or gain profit in one month.

imported Vietnamese cotton yarn experienced much less losses than Indian one and as cost of Vietnamese cotton yarn traders declined from Nov 2018, it started to profit since end-2018. At present, cost of new arrivals of Vietnamese carded 32S for air-jet weaving reached 22,500yuan/mt with profits of 100-500yuan/mt. The profit is predicted to keep at around 500yuan/mt in the future.

imported Pakistani cotton yarn saw large losses previously with the highest losses at 2500yuan/mt. It reduced to 500yuan/mt since end-2018. Currently, the cost of new arrivals of Pakistani grade A siro-spun carded 10S was 19,200yuan/mt with losses of 400-600yuan/mt. As cost of later arrivals falls, the profits will be restored gradually and recover to 300-600yuan/mt in one month.

On the whole, profits of imported cotton yarn traders will increase continuously as Chinese Yuan strengthens and cost of later arrivals reduces. On the other hand, although anticipation to macro economy improves and cotton price turns strong, it is still uncertain how long it will last. Amid sharp decrease of forward cotton shipments, if downstream demand gets poor, forward imported cotton yarn has potential to slide further. In long run, the wider price spread between foreign cotton and domestic one is favorable to imported cotton yarn. However, for downstream, the appreciation of Chinese Yuan will lower the competitiveness of textile and apparel export, which is unfavorable to demand for cotton yarn.

Note: Analysis of Indian cotton yarn and Pakistani cotton yarn adopts 60-day operation cycle while that of Vietnamese one 30-day. The cost of L/C issuing and clearance is 250yuan/mt. The forecast is based on the assumption that spot price will not change and the exchange rate of Chinese Yuan against USD is 6.8510.

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