U.S. ban on Xinjiang cotton extended, Chinese cotton prices may have peaked before CNY

• January 14, 2021

The timeline of CBP’s ban on Xinjiang cotton and the scope is showed below:

The extension of the ban cools down the market sentiment somewhat as cotton prices have been rising pushed by downstream demand and the market expects a competition between cotton crops and food crops on planting areas worldwide. We consider that the Chinese cotton prices may have reached the periodical high before the Chinese New Year holiday.

The major driving force for the higher ZCE cotton futures from Dec is the improved demand from downstream markets. This part of demand not only includes the better demand from Europe and the U.S., but also includes the replenishment from domestic downstream fabric mills and cotton yarn traders for the period after the Spring Festival holiday. Cotton yarn inventory is low, and the improved cotton yarn demand continues to push up cotton prices, and most ginning factories in Xinjiang sell out the cotton inventory. Before Jan 14, the cotton yarn demand has not cooled down obviously. ZCE cotton futures market slumps on Jan 11-12 affected by higher U. S. treasury yields, lower commodity prices and severe pandemic situation in China, but the futures rebound quickly with the strong support of cotton yarn market and the expectation on the competition between cotton crops and food. On Jan 13, USDA’s Jan supply and demand report forecasts lower U.S. cotton production and global ending stocks, which drives the market up. But the ban announced on Jan 14 (Chinese time) may make the driving force change in short term.

Downstream fabric mills and cotton yarn traders mainly replenish feedstock on expectation of coming buoyant season after the Spring Festival holiday, and some expect demand recovery in Europe and U.S. after the deployment of vaccine, but the latest ban of CBP may slow down the replenishment tempo and may impact the recovery of export demand somewhat after the holiday. Currently, mills have good orders, but grey fabric demand is far less than cotton yarn, and fabric mills in some regions plan to have holiday in advance. So with the impact of the ban, cotton yarn demand may weaken, and ZCE major cotton contract, May contract, may be hard to hit 15,500yuan/mt or even 15,300yuan/mt before the Spring Festival holiday. Though cotton yarn prices may not decline immediately due to its low cotton yarn inventory, feedstock inventory in fabric mills and spinning mills has been relatively high, and the weakness in demand before the holiday may be seen.

The bans announced by the CBP show the determination of U.S. to put pressure on China, and the ban on Xinjiang cotton may be hard to solve in short term. As the scope of the ban expands, downstream companies will also increase their risk aversion. Under the circumstance that the U.S. does not loosen the Xinjiang cotton ban, there are only two ways to rely on the market to solve the problem: 1. Export companies use imported cotton and imported yarn, the rising cost is borne by U.S. companies; 2. U.S. companies refuse to bear the rising cost, and export companies turn to compete in the domestic market or other export markets under the pressure of cost. Regardless of the solution path, in the short term, the impact of the expansion of Xinjiang's cotton ban on domestic cotton cannot be ignored.

The market after the Spring Festival holiday shall keep an eye on the buoyant season. If the demand cannot reach the anticipation, the cotton yarn that is replenished may be sold at discounted level, but the cotton prices will be affected by the planting expectation during planting period.