Despite the textile industry crisis, cotton prices in the Pakistani market have remained stable. The reason behind this stability is that the continuous hammering of the rupee by the US dollar has stabilized the local lint rates.
The drop of around 35 percent in cotton production did not create the expected panic in the market because there are few buyers. The bad news for the textile industry is coming both from the global slowdown and some measures taken by the government of Pakistan and the central bank under economic compulsions or IMF pressure. The power and gas subsidy incentives have been withdrawn by the government under IMF pressure which has increased the cost of spinners significantly as power and energy are major components in yarn cost. The increase in policy rates by 3 percent would significantly add to the cost as spinners procure cotton for the whole year against bank loans and a 20 percent markup is beyond the capability of spinners to pay.
The crisis in the textile sector might force smaller spinning units to close down. The composite units might survive but may not earn profits. Withdrawal of incentives to farmers like subsidized power would impact cotton farmers and producers of other crops as well. Cotton production was already on the decline; the cost pressure would further dent better crop prospects.
The demand for cotton is not strong despite low stocks. The cotton buyers and the ginners are facing uncertainty. The spinners enter the market when they see the dollar rate galloping but the ginners then sell with caution hoping to get better prices. But the spinners refuse to pay higher prices and withdraw from the market.
The spinners are having a torrid time after the government increased the subsidized power rates from Rs19 per unit to Rs41 per unit. The increase in the dollar rate has also made the import of cotton expensive (if the government relaxes L/C conditions).
It is imperative that given the current low local cotton stocks, the demand would increase which is the reason that ginners are reluctant to part off with their limited stocks. Delivery of imported cotton is struck due to the ongoing LC issue. Moreover, the increasing dollar value would also increase the imported cotton cost.
The local cotton market on the last working day of the week remained steady and the trading volume remained low. The rate of cotton in Sindh varied from Rs17500 to Rs21000 per 37.5 kg. In Punjab, the cotton was disposed of in the price range of Rs18000 to Rs20000 per 37.5 kg. The rate of Phutti in Sindh was quoted between Rs7000 to Rs8300 per 40 kg. The rate of Phutti in Punjab was Rs7000 to Rs9200 per 40 kg.
In the United States, the past week has proven to be another week of choppy trading with cotton prices trading within the ever-present range of low to mid-80s. Despite hawkish macroeconomic data on Friday, cotton prices rallied going into the weekend, having strong export sales to thank for the boost. The following days were relatively quiet with May futures finding resistance around 85 cents per pound. News from China helped spur another rally that had May futures finishing above 85 cents on Wednesday. The rally was short-lived, however, and May futures finished the week ending Thursday, March 2 at 83.71 cents, up 155 points from the week prior. Total open interest was unchanged from the previous week, increasing 646 contracts to finish at 185,782.
Globally long-staple cotton is available in the United States and some Latin American countries. In the US the market is still focused on news of inflation and interest rate expectations, which kept indexes up and down this week. On Friday, the Personal Consumption Expenditure (PCE) Deflator, which is a measure of inflation, increased by 5.4 percent, a bigger increase than expected. Although this sent markets down, including most commodities, the strong Export Sales Report released that day allowed cotton to overlook the otherwise bad market news. On Wednesday, it was reported that China’s manufacturing grew at the fastest rate in over a decade, helping boost commodity markets with hopes that demand will also increase.
Solid export sales were reported last month. Last week’s massive number of sales makes this week’s look small in comparison, with 170600 Upland bales booked for the 2022/23 season and 97200 for the 2023/24 crop year. Broad participation in sales was reported again, with 18 different countries reporting sales. The biggest buyer this week was China, buying 81600 bales, followed by Vietnam with 78900 bales, India with 18400 bales, and Turkey with 15200 bales.
As many traders start to think about planting season and next year’s crop, long-term weather outlooks are receiving short but total attention as they are released. Otherwise, next week’s March WASDE report and the weekly Export Sales Report will dominate the trader’s focus. Economic data and recession woes will continue to keep markets volatile.
