Karachi, March 12, 2014 (PPI-OT): USDA recently released its cotton report for March14 wherein Cot look has reduced its global consumption estimates for MY2014/15 (MY: Marketing Year starting August 1st) by 270k bales to 109.21mn bales, resulting in an increase in ending global inventories by 285k bales to 96.75mn bales.
According to AKD Securities, USDAs forecasted increase in global inventories ex-China will likely put downward pressure on cotton prices close to the next cotton harvest. While a decrease in cotton prices may improve gross margins slightly 2QFY15 onwards, AKD Securities still advises caution for pure yarn plays as a change in Chinas cotton policy will likely result in lower demand for yarn from China. Moreover sharp PKR appreciation is likely to put pressure on the export oriented textile sector.
USDA Cotton report key takeaways: USDA released its monthly cotton report for March14 on Monday. In this regard, USDAs production estimates for MY2014/15 remained largely unchanged while on the demand front, USDA revised its total global consumption estimates downwards by 270k bales to 109.21mn bales, resulting in an increase in ending global inventories of 285k bales to 96.75mn bales. From Pakistan’s vantage, a downward revision of 500k bales was witnessed in consumption and consequent imports based on weak demand outlook.
Cotton Outlook: USDA also recently released its outlook for MY2014/15.
In this regard, Cot look forecasted an increase in cotton production led by 25% higher production in the US. While higher cotton prices are likely to sustain during the current MY2013/14 with Cot look A Index currently at US$0.97/lb, an increase in production coupled with lower cotton import demand from China (primarily due to a change in Chinas cotton policy) will most likely result in declining global cotton prices during the next cotton harvest. The decline in cotton prices will likely be fueled by an increase in cotton inventories ex-China resulting in increased inventories available in the market.
Global Cotton Statistics:
(mn bales) MY11/12 MY12/13E Feb MY13/14E Mar MY13/14E MoM*
Production 126.64 123.07 116.67 116.68 0.01
Dom. Consumption 102.83 106.37 109.48 109.21 (0.27)
Imports 45.02 45.95 38.45 38.43 (0.02)
Exports 46.04 46.70 38.47 38.45 (0.02)
Ending Stocks 73.32 89.17 96.47 96.75 0.28
of which China 31.08 50.36 57.31 57.81 0.50
China as %age of global inven. 42% 56% 59% 60%
Absolute Change in Estimates Source: USDA Report and AKD Research
Investment Perspective: A decline in international cotton prices will also put downward pressure on local cotton prices. The expected decline in cotton prices is already driving Yarn prices lower in China which is resulting in erosion for export oriented yarn manufacturers in Pakistan. A decline in cotton prices next year will likely result in a slight improvement in gross margins for yarn manufacturers 2QFY15 onwards. However, AKD Securities is also likely to witness a decline in yarn exports to China as the Chinese start to draw down their cotton inventories next year. In this regard, AKD Securities continues to advise a cautious stance against pure spinning plays. Moreover sharp PKR appreciation is likely to put pressure on the textile oriented export sector in the short term.