Sharp decline in global cotton prices

25 May, 2012

With increasing uncertainty of the global economic health and the Eurozone woes continuing to enlarge and expand, most commodities prices fell sharply with cotton being no exception. On last Wednesday, raw cotton futures (ICE) on the New York market fell to fresh 2-1/4-year low due to deepening economic worries over the Eurozone debt crisis.
The key July 2012 cotton futures contract fell by 3.01 cents per pound to close at 71.51 cents per pound on Wednesday. The new crop (2012-2013) December contract conceded 2.82 cents per pound which closed at 68.75 cents per pound. Local lint prices for the higher grades have lost about Rs 300 per maund (37.32 Kgs) this week and now prevail at about Rs 5,700 per maund. On Thursday Sindh lint prices reportedly ranged from Rs 4,700 to Rs 5,700 per maund, while those in the Punjab are said to have ranged from Rs 5,000 to 5,700 per maund, according to the quality.
According to one report, there were offers for new crop (2012-2013) for July 2012 delivery from Shahdadpur in Sindh at Rs 5,000 per maund (37.32 Kgs) but this information could not be substantiated. The Karachi Cotton Association (KCA) reduced its ex-gin price by Rs 200 per maund (37.32 Kgs) during this week and has fixed it at Rs 5,700 per maund (37.32 Kgs) for grade three cotton.
As a result of languishing cotton prices and commensurate rate decline in yarn prices, mills have become reluctant buyers. The extremely bearish news on the Eurozone economy leaning towards a definite recession has also impaired yarn and other textile business.
These are extraordinary times when ready lint prices have fallen from Rs 14,000 per maund (37.32 Kgs) during the first week of March 2011 to about Rs 5,700 today for the better grades.
The prices of cotton seem poised to fall further during the forthcoming weeks and months when new crop (2012-2013) at different origins including Pakistan arrives in abundant numbers adding to the carryover stocks in China and India. Lint prices are facing a plethora of problems, both intrinsic and extraneous, while trying to keep a modicum of normalcy.
Reports indicate that declining Chinese and Indian cotton prices, extraordinary caution being exercised by the mills in building inventories, general decline in the commodity complex, notable appreciation of the American dollar, speculative sales, better prospects for the American crop, fears of Eurozone turmoil and recent tumbling of equity markets have all added up to impart the present malaise to the cotton market.
Reports indicated in the evening that several exporters who had earlier bought cotton for shipments are now selling the cotton domestically. Additionally, some mills are also selling their cotton locally in a extremely bearish market. Thus in line with the global cotton as well as the overall bearish condition of the economic conditions around the world, local cotton and textiles are also bearing the brunt of the universal recessionary phenomenon.
On the economic and financial front, we appear close to entering a black hole where the global business and banking may reside for a prolonged period, inflicting unprecedented pain and penury to the people at large. The scene appears to be turning more dark and dismal with each passing day as the global leaders have not yet reached a credible meeting point or a functionary platform from which to tackle the gloom of the global economic disarray. The scenario is too scary to provide any solace or hope of an early economic revival around the globe. Now about all the countries of the world are dangerously and deliriously involved in this unpercented depth of economic downturn.
The past one week has probably received the worst signs and signals of a global economic and financial collapse since the downdrift in global banking and businesses starting in 2007-2008 witnessed in biggest indicator with the collapse of Lehman Brothers. Then one by one much if not most of private banking in the USA, the United Kingdom, France, Greece, Spain, Portugal, Iceland, Ireland and elsewhere failed and was taken over by the public sector agencies of the sundry governments. That saga of global decline continues in its fifth year with no hope of any early recovery or, recompense.
This week the International Monetary Fund (IMF) told the British Government to do more to raise demand and also further cut its interest rates, which are at an already record low level, to push up Britain's floundering growth. Not only has Britain not recovered from the financial crisis of 2007-2009, but fell into recession at the turn of the year. It is further reported that British economic growth is very sluggish while unemployment, including the workless youth of the country, is painfully high.
Other leading economies, including the emerging economies, are faring no better. For instance, Japan is carrying a massive public debt which is hardly reducing at all. Consequently, Fitch rating agency this week cut Japan's rating by two notches for its slow speed in tackling its economy which is the world's third largest economy. Incidentally, Moody's had slashed the ratings of Spanish banks last week by a reported one to three notches due to continuing recession, the interminating real estate crisis and increasing levels of unemployment, particularly of the younger generation.
The Chinese manufacturing activity continues to contract and slipped again in April 2012. Crisis in the Eurozone continues with all its ferocity with the exception of Germany. The European economy is weakening day by day with increasing number of sufferers facing unemployment. However, in their utter plight, the European people appear helpless and are losing all hope and confidence regarding the remedial measures being taken by their respective governments.
At midweek, the European Union leaders had gathered in Brussels but could not declare a decisive solution to help or stop the diving downfall in their various economies. Somehow the European leaders want to boost the economy of the continent which has almost come to a halt. The leaders in Europe may take another month to formulate a workable and a sustainable economic policy. However, the Europearn leaders are in a catch- 22 situation because they want to push austerity and economic growth at the same time, which prima facie appears contradictional.
The BRIC economies are similarly faring no better. India is slowing down since last one year and its currency is depreciating rapidly. Russia relies largely on the exports of its raw materials, primarily gas, crude oil and gold. Brazil bases its output largely on sugarcane, cotton and soyabean. Thus the European markets are reportedly awash with fears that with a systemic meltdown the security and wellbeing of the entire world will be all shook up. The immediate fear of the Europeans is that any banking breakdown will further undermine the underlying and existing economic weaknesses plaguing the continent.

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