Volatility refuses to die in the cotton market. After closing October at 2-year low price of 72cents per lb, world cotton prices have witnessed their sharpest rise since November 2010, rising by 21 percent in just last week. Does this mark the return of the bulls to the local market as well?
Just last month, USDA had signaled lowest world cotton demand since Covid, as inventories piled up with both cotton processors and downstream value-add chains. Even as risks of a global recession remain strong, alarms have been raised over the past month regarding a sharp decline in global output, led by mass abandonment of cotton crop in the US. The downward revision in cotton forecast for world’s largest exporter seems to have triggered panic buying over the last week, leading to highest weekly rise in world’s cotton prices in over a decade.
Although more clarity will appear on the horizon over the coming week when USDA releases its monthly update, it seems that the lost cotton crop in US may not be replaced by other major producers. Among the top-ten producing regions, Pakistan remains the weakest link, where uncertainty over seasonal arrivals compounded during October.
First, the national cotton ginners’ association, PCGA, failed to release fortnightly report for mid-October, raising alarm bells over plummeting cotton output due to havoc wielded by monsoon floods from Jul-Sep. Channel checks at the time indicated that PCGA’s decision was deliberate and aimed to arrest the freefall in cotton prices that was ongoing at the time. Why?
It appears that local cotton trade plummeted during October after spinning industry rushed for cover due to collapse in world prices. Since the beginning of calendar year, local spinning industry has been engaged in careful inventory buildup in anticipation of rising cotton prices due to US-Sino tensions and outbreak of armed conflict in the Black Sea. To their horror, the collapse in world cotton prices during October and slowdown in demand from textile exporting destinations meant booking significant inventory losses, bringing local cotton trade volume to a virtual halt, despite supply constraints.
Anticipating further decline in local cotton prices upon disclosure of unsold inventory with ginning factories, PCGA held back the fortnightly release. The action did little to arrest the freefall in prices, until world cotton price reversed beginning last week, providing support to local price above dollar equivalent 90 cents per lb.
What happens next is largely dependent on USDA forecast for other major producers such as Australia, Turkey, China, India, and Brazil. If other major producing regions can pick up the slack, world prices will continue their reversion to mean. If not, there may be some hope of ginning factories attempting to offload remainder withheld stock in the local market during November, making most of the short expiry bonanza while it lasts.
Either way, it’s a difficult year ahead for textile industry, which had already begun to cut back on cotton import orders in anticipation of a significant slowdown in export by value-added segments. It remains to be seen for how long higher prices can last on the back of constrained supply alone, when world outlook for garments and textile is in a downward slide. Production cuts may, therefore, become inevitable sooner or later.
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