Source:  Mambo

October 26, 2021

The market saw plenty of ups and downs over the week, eventually settling at 108.26 c/lb on Dec, up 107 points in the week. The shipping industry remains in turmoil with many asking, when will this end? The answer is certainly not before Christmas, and according to the Chief executive of ONE shipping company, not before 2023 unless there is governmental interventions to boost investment in the capacity of ports, railways, and warehousing.

Looking at the massive profits made by shipping lines this year, it could question the incentives of the shipping companies to bring an end to the current turmoil when huge profits are being made off the back of the crisis. 

The complexities of the global supply chain and the current turbulence in the industry have halted a globalised approach and forced businesses to look closer to home for their suppliers. Localised supply chains could be the future bringing an end to the externalization of key products in the Far East to satisfy demand.

Time will tell if this happens, but once businesses set in motion more localised supply chains it is an expensive and long term approach which cannot be undone easily once those wheels of change are put in place. 

There is belief that the Indian market could play a key role on the future of basis. The crop is expected to be at 35 to 36 million with consumption at around 33.5 million bales. Bangladesh and other Far East countries will no doubt be keen buyers of this origin, a comparatively cheaper cotton that is on the doorstep largely free from shipping delays.

If Indian cotton starts to get offered in greater volume we could see other origins be forced to decrease the basis in order to compete for market share. That said, with such strong consumption in India a large portion of the crop could remain on their shores, leaving slim pickings for the rest of the world and possibly helping strengthen the basis. 

For now though, any weakening of basis has yet to be seen, perhaps propped up by the ever increasing shipping costs that need to be passed down the supply chain. Demand is a key to a strong basis and this remains good, with Bangladesh, China and Vietnam enquiring and buying at supported basis levels.

Mill demand for cotton at the current prices suggests they are able to secure purchases of cotton whilst also making money at these elevated levels. Demand was further evident in the USDA weekly report where sales of close to 400k bales were reported for the current crop, with China buying 270k bales. China’s state reserve sales have started to slow with take up averaging around 30% of the offers last week.

This is not suggesting demand is slowing in China but simply that import cotton (US and Brazil) is around 20 c/lb cheaper than the states offering levels. US shipments were only 117k bales, with these low figures expected to continue due to a late crop and supply chain disruptions. 

Inflation in the US is now close to a record high for this century. With increasing inflation, a large spec long, and good demand for cotton it is hard to be overly bearish prices. It would take a major macro event to pull cotton prices out of the $1 level. (Source: Mambo)