Cotton leads way in Chinese commodity rally
Chinese cotton futures scaled fresh multi-month highs, despite the huge volumes of cotton being pushed into the domestic market. Prices for the fibre are surging amid a broad Chinese commodity rally, fuelled by currency-weakness.
September cotton futures on the Zhengzhou exchange rose as high as RMB 14532 a tonne, a 21-month high for the second-month contract. The contract closed up RMB 14395 yuan a tonne, up 4 % on the day.
State auctions flood market
The rise in prices comes despite a the huge volumes flowing onto China’s domestic market, from auctions of state reserves accumulated due to a now-defunct price support programme.
Auctions on June 29, 2016 saw all 18000 tonnes of cotton on offer snapped up, following full uptake of 21700 tonnes offered on June 28.
Prices charged for the cotton have also been rising from last week. An offer on June 29 saw cotton bought at an average of RMB 13202, about USD 1986 a tonne. On June 28 the offering was sold at RMB 12896, compared to the RMB 12230 price achieved at an action last week.
These Chinese auctions have now shifted over one million tonnes of cotton, far exceeding auctions last year, which saw minimal uptake. But as analysts have been pointing out, a hefty uptake of the offered cotton is hardly a bearish sign, even though it eases short-term pressure, as it underlines the appetite of textile mills for fibre. And the auctions have especially demonstrated the demand for higher grade cotton, of the variety that the US exports.
The Chinese yuan has been sliding against the dollar since June 24, as the shockwaves of an unexpected UK decision to exit the European Union fuelled a worldwide shift away from risky assets.
The RMB plumbed fresh five-and-a-half year lows on June 29, although it recovered a little, to finish unchanged at 6.6436 to the greenback on the currency spot markets.
The weaker RMB is broadly supportive for local-currency-denominated commodity prices, spurring a rally in Chinese markets this week, which has endured as the country’s central bank looks content to sit on the side-lines, rather than intervene to support the currency.
As well as making imports more expensive, the weaker yuan could also be a boon to exporters, making their manufactured goods more expensive. “China’s textile industry will be more competitive as a result and will, perhaps, need more cotton,” said Tobin Gorey, at CHS Hedging.