Apparel / Textiles & Accessories

On August 23, the "Announcement on Matters Concerning the 2021 Central Reserve Cotton Rotation" was released. The next day, the closing price of cotton futures CF2201 fell sharply by more than 400 yuan/ton. The contract hit 17,365 yuan/ton during the intraday session, a record low in the past two weeks. When the domestic cotton futures rushed forward after surging 18,000 yuan/ton, the announcement of this announcement was of great significance, and the hot cotton futures market significantly cooled down in the short term. Cotton is a vital raw material for cotton spinning enterprises, and it largely determines the profitability of cotton spinning enterprises. It can be said that the relevant agencies have introduced this policy in a timely manner from the perspective of the cost of cotton consumption by downstream enterprises and the health of the industrial chain.

The policy is released, reserve cotton only allows textile companies to participate in the auction

In order to ensure the cotton demand of cotton textile enterprises, on August 23, China Reserve Cotton Management Co., Ltd. and the National Cotton Trading Market issued an announcement on matters related to the rotation of the central reserve cotton in 2021.

The announcement clarified that from August 24, 2021 to the end of the current year's round, the reserve cotton round-out transaction is limited to textile cotton enterprises to participate in the bidding, and non-textile cotton enterprises to participate in the bidding are stopped. The reserve cotton purchased by textile cotton enterprises is limited to the enterprise's own use and may not be resold.

Affected by policy, cotton and cotton yarn futures prices have dropped sharply

According to statistics from China Yarn Net, the price of cotton spinning raw materials in the first half of this year increased significantly. From July 1 to August 23, the main contract of Zhengzhou cotton futures rose by 12%; from July 1 to August 23 , Cotton yarn futures 2201 rose 10%. Recently, cotton futures set a new high in the past three years. After breaking through 18500 yuan/ton, they have recently dropped sharply to about 17,500 yuan/ton. Affected by this, the market has a strong wait-and-see atmosphere, and more downstream purchases are on demand.

Affected by the adjustment of the reserve cotton rotation policy, on August 24, the futures prices of cotton and cotton yarn fell sharply. On August 24, the cotton spot trading atmosphere was better, and the spot price transactions were more active. Some textile companies and traders bargained at lows on August 24. CF201 closed at 17,385 yuan/ton, down 475 yuan/ton from the previous trading day. The decline was 2.66%. Price purchase; on August 24, the domestic reserve cotton auction was still 100% sold, but the average transaction price dropped sharply by 611 yuan/ton to 17,186 yuan/ton, discounted to 3128B, and the price was 18389 yuan/ton, down 582 yuan/ton from the previous day Ton.

In addition, on August 24, the settlement price of cotton yarn futures CY2201 contract fell by RMB 75/ton to RMB 25,770/ton.

Judging from the transaction situation of national reserve dumping in recent years, the same document was issued when cotton prices were relatively high in 2018. Subsequently, the transaction rate of reserve cotton plummeted, and the average transaction rate was around 40%. The cotton document was also released after the cotton price hit a new high, but the fundamental situation is very different from 2018. At this stage, spinning mills have tight orders and most of the finished yarn inventory is at a historical low. In addition, the price of cotton from reserve Looking at the discounted spot, textile companies will still actively participate in the auction of reserve cotton to effectively supplement the demand for cotton used by the factory.

Figure: Inventory of textile enterprises in mainstream regions from 2018 to 2021

It is understood that as of August 20, the yarn inventory of textile enterprises in major regions of the country was 11.6 days, a decrease of 1.4 days from last week, a decrease of 12.1% from the previous month and a decrease of 53.1% from the same period last year. Most textile companies have tight schedules, and orders can be maintained at the level of 20-30 days. The supply of pure cotton 32S and 40S yarns in spinning mills is tight, and it takes about a week for bulk goods to be shipped. Spinners have a strong willingness to stand up prices when finished product inventories are low, mainly based on the delivery of early orders by traders; it is expected that the product inventory of textile enterprises will remain at a low level in the short term.

Since entering August, the overall market for the yarn end, which was originally strong, has weakened. At present, the trading atmosphere in the spot market of pure cotton yarn is not good, and the trading volume is declining. Affected by the sluggish downstream demand and the cotton callback, the quotations of textile enterprises have been loosened, and conventional varieties have been lowered by 200-300 yuan/ton. New orders are relatively scarce, but companies are still rushing to make pre-orders, so inventory is still at a historically low level.

In terms of varieties, conventional yarns and high-count yarns are relatively weak, while open-end spinning has improved slightly. In terms of price, Shandong-made JC40S bleaching quality will arrive at 31,500-32,000 yuan/ton, Shandong-made high-quality C40S will be delivered at 28,500-28800 yuan/ton, Sichuan-made C60S bleaching quality will be quoted at around 37,000 yuan, and Jiangsu-made C32S jet belt. The ticket ex-factory price is 27000-27500 yuan/ton.

Curb the excessive speculation of cotton in the capital market

In the first half of this year, a large amount of capital poured into cotton and even cotton yarn futures markets for investment, and the rush of cotton futures prices inevitably made people worry that excessively high raw material costs would destroy the normal textile industry. The implementation of the policy shows the country's determination to care about the healthy development of the textile industry chain. China Yarn Net believes that the announcement is mainly to ensure the use of cotton by cotton spinning enterprises, and cotton spinning enterprises are the least affected. It is beneficial to cotton spinning enterprises to purchase cotton in the long term and reduces the risk of raw material procurement. .

Chart: The closing price of the cargo market on August 25

As the announcement strictly supervises the cotton reserves and prevents capitalization, it will partially curb the hype of cotton in the short and medium term. Further stabilization of cotton prices will benefit the stable operation of cotton enterprises.

Follow-up also needs to observe the listing price of new cotton. At present, there is still a month to go before the launch of new cotton, and the market expects seed cotton to go public. It is expected that even if the purchase price of new cotton rises to 8-10 yuan per kilogram this year, there will be ginning plants to grab it.

External demand for textiles is better than domestic demand

Due to different domestic and foreign measures to deal with the epidemic, the progress of economic recovery at home and abroad is different, and the performance of external and domestic demand in textiles and clothing is not synchronized.

In terms of external demand, from January to July, exports of textiles denominated in US dollars decreased by 10.8% year-on-year, and increased by 15.7% year-on-year; clothing exports increased by 32.9% year-on-year and 7.0% year-on-year. Among them, in July, textile exports fell by 26.7% year-on-year and 6.5% month-on-month; clothing exports increased by 8.3% year-on-year and 9.4% month-on-month. With the recovery of the global economy, coupled with the advancement of Christmas orders and the transfer of orders in some regions, clothing exports continue to grow.

In terms of domestic demand, from January to July, the domestic retail sales of apparel and textiles increased by 29.8% year-on-year, only 2.3% year-on-year. Among them, the retail sales of apparel textiles increased by 7.5% year-on-year in July. The normalization of the domestic economy has recovered, and the retail sales of domestic apparel and textiles have only slightly increased compared to before the epidemic. Overseas stimulus policies continue to increase, and external demand for textiles is significantly better than domestic demand. However, orders for domestic sales have not yet started during the peak season. It is recommended that companies pay attention to the placement of export orders and domestic orders.

From the perspective of the specific links of the industrial chain, from January to July, yarn output increased by 16.0% year-on-year, down 11.8% from the same period in 2019; cloth output increased by 12.7% year-on-year, down 28.7% from the same period in 2019. Recently, the profit margin of cotton yarn is relatively large, and the profits of grey fabrics are constantly squeezed, and the downstream profit transmission is not smooth. The inventory performance of different links is also different. Textile companies still have active replenishment requirements for cotton raw materials, the inventory of finished cotton yarn is low, and the inventory of weaving mills has increased slightly.

Pay attention to the follow-up "Golden Nine and Silver Ten" downstream orders start

Cotton futures prices have fallen sharply, and yarn prices are expected to be adjusted in the short term. However, the current list of yarn mills is tight, and the finished product inventory of pure cotton yarn factories is maintained at a low level. Orders can be maintained until the end of September, which still supports cotton prices. It is expected that cotton prices may fluctuate in the short term.

At present, some people in the downstream are pessimistic. Due to the current overall weak terminal demand, market transactions have not improved significantly near the peak season of September, the market is not confident enough to rise, the frequency of orders is reduced, and Christmas foreign trade orders are overdrawn in advance, and weaving factories In terms of new orders are limited, it is recommended that companies pay attention to the follow-up "Golden Nine and Silver Ten" downstream orders start.

Not allowing traders to participate in the auction to reserve cotton is undoubtedly beneficial to the operation of textile enterprises. It also shows that the cotton supply is tight due to the high fluctuation of cotton. There is still one month before the new cotton goes on the market. What do you think of the cotton and cotton yarn market outlook? Welcome to leave comments and discuss together.