Is cotton price at the bottom? Don’t copy “halfway up the mountain”! The two major leaders in the domestic color spinning industry are still slowing down the pace of raw material replenishment

On March 24, the Zhengzhou Commercial Institute’s cotton textile industry research team visited two leading companies in the color spinning industry, listened to the company’s production and operation introduction, and exchanged views on the cotton market outlook. The key points are summarized as follows.
1. The production of large factories is increasing, but the inventory of raw materials dare not be enlarged. Company A has a production capacity of 1.2 million tablets and is currently operating at full capacity. The company has production subsidiaries in Vietnam, Zhejiang, Hebei, Shandong, Jiangsu and other places. Its main products are various types of colored yarn. In 2015, the yarn output reached 150,000 tons. The quantity of raw materials purchased increased by about 20% compared with the same period last year. Currently, the raw materials The inventory lasts for about 3 months, which is a significant change from the 3-6 months of raw material inventory in previous years. Company B has formed a production capacity of 1.35 million spindles through mergers, acquisitions and new construction. It has five major production sectors in Zhejiang, Yangtze River, Huanghuai, Xinjiang and overseas. It occupies 40% of the domestic high-end colored spinning market. In 2015, the company’s profits were relatively good. Cotton consumption last year reached about 300,000 tons. Affected by the continued decline in cotton prices, the two industry leading companies have also had to slow down the pace of raw material replenishment and lack confidence in when to rebuild inventories in the future.
2. Downstream demand is not good, short orders are more. Affected by many factors, demand in the downstream market has declined over the past year, and the trend has not changed significantly. Colored spinning orders are mainly short-term orders, and customers basically do not place long-term orders. The delivery time becomes shorter, the diversity of customer requirements increases, and the difficulty of production increases accordingly. Textile companies are not worried about rising cotton prices, but are worried about falling cotton prices. The expectations from all ends are converging, leading to a vicious cycle of wait-and-see as the price drops, less orders placed as the price drops, and more pessimistic as the prices fall.
3. Worries about the quality of cotton reserves affect auction and storage strategies. From the actual experience of participating in the auction and storage and cotton purchase and storage process in previous years, the sample companies expressed concerns about the quality of cotton stored in warehouses. The existing problems mainly include quality inconsistency, loss of weight, three yarns, loose batches, etc. Although color spinning has slightly lower requirements for individual indicators of cotton quality, the existence of the above problems has greatly weakened the enthusiasm of enterprises to participate in auctions. It may even happen that no matter how low the price is, they have to wait for the official implementation of the auction before considering it. . This mentality will have an impact on the price trend of cotton after selling off reserves, and there are different judgments on the direction and extent of the impact.
4. The quantity of cotton in futures warehouse receipts is small and the price/performance ratio is not advantageous. As of March 24, the number of futures warehouse receipts on the Zhengzhou Commercial Exchange was 902 (including valid forecasts), equivalent to 36,000 tons of cotton. Such a quantity first affects the desire of large and medium-sized enterprises to obtain warehouse receipt cotton, and secondly, the premium for warehouse receipt cotton is too high, which reduces the cost-effectiveness advantage. Third, the selection of warehouse receipt cotton is significantly narrower than that of spot cotton. The existence of the above situation makes the enterprise’s futures hedging meaningless, the market service function is damaged, and it will also affect the market trend in recent months.
5. There is opportunity in crisis, and there are reasons for cotton prices to stop falling and rise. From the balance sheet, global cotton consumption has been growing slightly for many years. Although domestic cotton consumption has declined since 2012, in the long run, rising fiber demand is the main trend. Judging from the double-digit growth in orders of some sample companies in the first quarter, downstream demand, especially the demand for sportswear, is changing for the better. In addition, TPP affects the exports of domestic enterprises, but does not affect or even benefit the exports of these enterprises. The state reserve inventory seems to be large, but high-quality cotton is low. It is also possible that there will be a structural shortage of good cotton after the reserve is sold. If a certain method is adopted and so many large domestic enterprises work together, it will not be difficult to deal with this inventory.
Overall, the production of large enterprises remains normal, and their strong financial strength or subsequent financial strength makes their ability to withstand the risks of market troughs significantly stronger than that of small and medium-sized enterprises. However, slowing downstream demand, excessive cotton inventories, and stockpiling have suppressed expectations, making its raw material reduction strategy hesitant. Concerns about the quality of state-owned cotton reserves have intensified the difficulty of business decision-making. The price and quantity of storage sales may determine the future trend of cotton prices.