By Andrew Woods | Source: ICAC, ABARES, CRB, Cotlook, CottonInc, PCI Wood MacKenzie
Cotton is the largest natural apparel fibre by volume, and as such warrants some attention from other fibre producers. In the aftermath of the 2011 cyclical peak in apparel fibre prices cotton stocks rose, mainly in China, to high levels. The multi-year process of reducing these stocks to more normal levels continues. This article takes a look at where this process is up to.
Figure 1 shows world cotton stocks expressed as a percentage of consumption (left hand column), split into stocks held in China and stocks held outside of China. The graph begins in the early 1990s, and runs through to the current 2017-18 year where ICAC (International Cotton Advisory Council) estimates are used. Overlaid on Figure 1 is the Cotlook A Index, a widely used cotton price indicator.
While Chinese stock levels have fallen in recent years, however total world stocks continue to be around 83% with an expectation they will fall to 76% by mid-2018. Cotton stocks outside of China have picked up slightly in recent years, which is not helping the process of bringing stock levels down from over 90% in 2014 to around 40-55%, which was the general level of stocks in the 15 years leading up to 2011. This means the stocks to use ratio remains some 20% above the pre-2011 levels. Stocks have fallen by around this amount during the past three years, so it looks as though it will take another 2-3 years to drop down to the 55% level (which is not a low level).
ICAC have a price model which is based upon supply stocks and imports. The price projections are only mid-range, meaning there is a wide range of likely variation around the central projection. The current projection of 69 cents for the 2017-18 is some 17% below the 2016-17 average, which gives a feel for the effect of still current high stocks levels. It also means that upside for the cotton price (currency fluctuations aside) is minimal this season.
Figure 2 shows a ratio of cotton to polyester staple price from the late 1980s onwards. The ratio reached 2.0 in May and has since decline to around 1.6. However ICAC fret over this price ratio when it is significantly above parity (1.0) so it is still at a level which will cause concern with regards to polyester stealing market share from cotton. It is also another indicator which suggests cotton prices have limited upside.
Stock levels remain at high level for cotton. It will take another 2-3 years at least to work stock levels down to sustainable levels. The official ICAC price forecast for 2017-18 is around 17% below the average of 2016-17, reflecting the effect of high stock levels in the market. In addition the cotton to polyester staple price ratio is reasonably high, which is another drag on cotton prices. Therefore the upside of cotton prices looks to be limited. The implication for wool is that cotton prices will not rise to help support the increased wool prices of recent months.
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