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Will cotton yarn be spurred by the surge of cotton?

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 ZCE cotton futures soared immediately after a telephone conversation between China and US leaders and approached limit up. Under the expectation of eased China-US relation, market sentiment recovers somewhat on the whole. Thus what about the cotton yarn market amid the surge of cotton?

1. Price inquiries improve but the orders does not follow up.
Since last week, ZCE cotton futures has climbed up 1,000yuan/mt from the bottom and spot cotton up 800yuan/mt, but it is not well accepted by cotton yarn mills which keep look-on. Cotton yarn market confidence rallies and price inquiries from downstream plants increase somewhat, but the orders are not placed accordingly.

According to the chart above, inventory of cotton yarn mills declined recently due to much lower operating rate at 45% than the average in previous year. Many small plants shut down and medium to large plants cut production. On the other hand, downstream concerns are alleviated by the stop of decline of ZCE cotton futures. In Addition, cotton yarn mills are active in destocking, which also promotes sales.

2. Offers of cotton yarn tend stable, with increase in some varieties and regions.
With cotton price rising, offers of cotton yarn tend stable, but the trading price is hard to move up with high inventory. In fact, there are discounts in actual trading and some large spinners undersell frequently.

Even so, the prices of some varieties improve. For example, carded 40S for rapier in Nantong increased by 200yuan/mt after the surge of ZCE cotton futures, up by 200yuan/mt again later and was traded well. On the one hand, it decreased sharply in previous period and only approached 21,000yuan/mt delivered even after the rise. The cotton yarn mills still suffer large losses even if they purchase spot cotton and produce immediately. On the other hand, most producers are small and many of them shut down, leading to shrink of production. Thus, once the market improves, tight supply will appear.

3. Profit of cotton yarn mills deteriorates gradually.

Spot profit of cotton yarn mills decreases all the way alongside the rise of cotton price and it approaches cost line even if using state reserved cotton. That is to say, they are at a loss no matter using stocked cotton or spot cotton, which is also a reason why production is cut or suspended.

Cotton yarn price is expected hard to increase in short run. If downstream demand improves, the spinners will reduce discounts at first instead of raising offers. At present, downstream orders keep sluggish and procurement for rigid demand is also weak. Adding the unclear direction of China-US trade war, they prefer to keep cautious. Most market players hold pessimistic attitude to the negotiation between China and US on the trade war in end-Jun and to the sustainable rise of cotton due to reduced purchase demand. On the other hand, cotton yarn mills have high inventory, especially large ones which undersell frequently. They will keep destocking upon uncertainties in later market. As a whole, eyes are suggested to the negotiation between China and US in end-Jun.

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