Fitch Solutions forecast a recovery in cotton prices, even as New York futures slumped limit down, depressed by a fresh hit from Covid to Chinese demand hopes.
Fitch held at 110 cents a pound its forecast for average New York cotton futures prices in 2022, an estimate which, while below the market consensus of 120.6 cents a pound as reported by Bloomberg, would still require prices to stage some recovery from current levels.
Indeed, the estimate implies prices trading at “around 85-90.0 cents a pound for the remainder of the year”, said Fitch, whose forecast applies on a second contract basis.
The second contract, for March, on Monday slumped by the exchange maximum of 4.0 cents, to 79.78 cents a pound, as hopes that China, the top cotton importer and consumer, was controlling its Covid outbreak were dashed by its first reported deaths in six months, and a rise in cases in Beijing.
‘Dashed hopes’
China reported the deaths of three people over the weekend in Beijing, which reported 962 infections on Monday, up from 621 a day earlier.
“The trade is still worried about demand moving forward due to recession fears and Chinese lockdowns,” said Jack Scoville at Price Futures.
“It is possible that the continued Chinese lockdowns will continue to hurt demand for imported cotton.”
A UK cotton analyst told GrainPriceNews that the Beijing news, and reports of a lockdown too in Guangzhou, “dashed hopes that had been built with some signs of an easing in China’s stance on Covid.
“It had been looking much better for China, as was evident in the recovery in prices” from their near-two-year low of 70.10 cents a pound reached at the end of last month.
Dollar factor
For 2023, Fitch was upbeat on cotton prices too, seeing values average 94 cents a pound, some 16 cents a pound above the level that the market is factoring in.
“While we expect the annual average price to ease in 2023… this would still require prices to rise slightly from their current levels,” the analysis group said.
The forecast factored in strength from an easing in the dollar, which against a basket of currencies has fallen some 6.0% from its late-September high, amid ideas that US inflation has peaked, easing concerns over interest rate rises.
“One of the primary factors that has driven the easing of cotton prices during the third quarter of 2022 has been the strengthening of the US dollar, which capped the demand for commodities priced in US dollars.
“We expect the US dollar to continue to weaken from its current levels, which will support a rise in commodity prices including cotton from current levels in the months ahead.”
‘Will drive prices upwards’
Furthermore, China will turn into an ally of cotton bulls, in part thanks to the sanctions, over alleged human rights violations, on exports of items made from fibre grown in Xinjiang, which is responsible for some 80% of the country’s own production of the crop.
“Consequently, Chinese cotton mills looking to export textiles have had to increase their dependency on imported cotton, helping support global prices,” Fitch said.
“Already the largest importer of cotton, the US Department of Agriculture forecasts indicate a year-on-year growth of 8.4% in China’s cotton imports in 2022-23,” a dynamic that “will drive [global cotton] prices upwards in 2023”.
Fitch also noted the prospect of an 11% increase in Pakistan’s imports, following the floods which will leave the country’s own cotton output down by 16.7% year on year.
