Just when it felt like the market was getting ready to challenge major support below 82 cents, a late session rally lifted values back into the 'comfort zone'. It is not clear what prompted the buying of some 2'500 December near the close, with potential reasons ranging from the lifting of hedges against export business to rumors about China's Reserve sales policy.
China was an active buyer this week, as mills were trying to fill newly issued quotas, rumored to be in excess of 250'000 tons, that require cotton to be imported before the 20th of December. With prompt availability being one of the main factors, buyers considered a wide variety of high grades from origins like Greece, Mexico, India, the US, Australia, Spain or Brazil, and prices paid were in the mid 90s.
This latest round of Chinese buying has further reduced the remaining old crop inventory, both at origin and on consignment in China, and with new crop arriving slower than normal this season, we have yet to see any supply pressure.
Some traders begin to question whether we will see much crop pressure at all, because China continues to import at a decent pace and many other markets still have plenty of holes to fill, while the US and India have already committed sizable volumes that they need to cover first. In other words, it may take a while before the pipeline fills up to level at which there is excess supply to pressure the market.
The pace of Chinese imports remains the main price driver in our opinion, with China currently expected to more or less absorb the production surplus of around 11 million bales in the rest of the world. This week we learned that China imported 925'000 bales in September, which brings the total for the first two months of the season to 2.13 million bales, which equates to an annualized pace of 12.8 million bales.
Considering that mills just received a batch of quotas of over a million bales and that there will be another TRQ (Tariff Rate Quota) of 4.0 million bales issued in early 2014, imports of 10+ million bales seem certainly within reach.
The Certified Stock continued to grow this week and as of this morning it measured nearly 95'000 bales, including bales under review. One has to wonder why this cotton, most of which consists of 3135 and higher grades, is not being moved to China given their appetite for ready to ship imports.
Maybe the reason is that merchants prefer to use it as a tool to force carry into the market, which seems to be working, since the Dec/March spread has gone from a 300-point inversion to more than 100 points carry over the past couple of months. However, we wouldn't rule out a sudden disappearance of this certified stock just yet!
Yesterday the US government finally ended its shutdown by kicking the can further down the road, hoping to find a resolution to the debt issue over the next couple of months. It will still be several days before the USDA and CFTC are up and running again, so we will have to wait a little longer before we get updated export and commitment of traders data.
