Earlier this month, the United States Department of Agriculture (USDA) released its preliminary forecast of global cotton market trends for the upcoming marketing season 2023-24. USDA forecasts that the consumption will rise by 1.4 million metric tonnes (MMT) over the now concluding season of 2022-23, implying an annual increase of 6 percent against the long-term average of 1.5 percent over the past several decades. Does this mean that the global market shall finally turn a corner during the upcoming marketing year?
Not so fast. If global demand does clock in at 25.3 MMT (or 116 million bales of 480lbs or 217kg) during the upcoming year, it will still be lower than the past decade average consumption level of 26-27 MMT, especially in the years immediately preceding the Covid-19 pandemic. It is now clear as day that the post-Covid surge in fiber demand was an aberration. Recall that fiber demand rose by 18 percent year-on-year between marketing years ’20 and ’21 that followed resumption of commercial activity amid early vaccine roll out. In the months that followed, world cotton prices rose at an unprecedented pace, rising by 160 percent between mid CY20 and CY22 from the Covid bottom of $1.40 per kg to $3.6 per kg, peaking out with the outbreak of Russian invasion of Ukraine.
However, ever since, the world cotton market has only seen worse days. Over the course of marketing year 2022-23, world prices fell by nearly 40 percent even as global supply remained largely stagnant, amid widespread destruction of crop in major producing regions such as Pakistan. In fact, global consumption fell to 23.9MMT by year end as per USDA’s estimates, levels not witnessed in over a decade barring during the extreme months of Covid lockdown.
This means that the upbeat forecast from USDA follows a severely low base impact, and need not foretell a resurgence in global prices which even today are at significantly elevated levels compared to pre-Covid long-term average of $1.75 per kg. These elevated levels come at a time when global cotton demand is witnessing a long-term secular decline against competing fibers – both natural and chemical based. And while return of inflation across major producing nations over the past two years may explain the stubbornness of nominal prices in returning to pre-Covid levels – justified by a rise in cost of production – two other factors may also be playing a role.
Even though world cotton consumption is witnessing a muted rise, market prices still remain influenced by the Xinjiangcotton ban which keeps import demand from China at artificially elevated levels, a fact unaddressed by the USDA. This is now coinciding with 100 percent restoration of commercial activity in China, along with a failure of global trading powers to diffuse tensions. Meanwhile, the severe volatility in the oil market has ensured that prices of chemical-based fibers remain on the higher side, providing a cushion to global cotton prices which could have otherwise altogether crashed due to weak demand in the latter half of 2022. In fact, it may even be argued that for at least past five years, global cotton prices have been saved by output volatility in countries such as Pakistan along with the Xinjiang cotton ban.
Let’s see whether Pakistan shall manage to be a spoiler in the upcoming year or not.
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