Cotton prices edged higher for a fourth day amid talk that the huge order by China of US supplies last week was not a one-off – although caution remained about a sustained recovery.
New York cotton for December delivery added 0.3% to 103.80 cents a pound on Thursday, ahead of US weekly export sales data expected, once again, to show bumper purchases by China, the top consumer and importer of the fibre, besides being the top producer.
Data last Thursday showed China buying 996,100 running bales in the week to November 3, a figure which stunned investors, and was termed "massive" by Texas A&M University farm economist John Robinson, but was initially dismissed as a one-off.
However, market talk has revealed a "strong suspicion" that last week’s sale "was not all the sale and that there would be more" in today’s data, for the week to November 10, Mike Stevens, the veteran Louisiana-based cotton analyst, said.
"How much, I have no idea but do not be surprised with another very good figure," he said.
‘Incentives to import’
The speculation tallies with talk that China is seeking to replenish state reserves which are estimated in the market at about 1m tonnes, below the 2m-3m tonnes at which the country is seen as likely to feel more comfortable it has the ammunition to keep a lid on domestic prices.
While domestic supplies are being used to fill some of the shortfall, China’s own production does not come cheap, with the benchmark May contract trading on the Zhengzhou exchange at 20,395 yuan $3,211) a tonne on Thursday, equivalent to 145 cents a pound.
"Since September, China has been purchasing cotton from domestic producers at prices equivalent to 140 cents a pound, which is stopping domestic prices from falling and creating incentives to import," Commerzbank said.
Indeed, official data showed the country imported 252,300 tonnes of cotton last month, up 163% year on year, with Commerzbank clocking market speculation that buy-ins "could reach even 300,000 tons in November and December".
However, the firm outlook for Chinese imports contrasts with demand from many other countries, including the US.
America’s mills have been using the fibre at an annual rate of 3.25m bales so far this month, a marginal increase on October’s 3.21m bales but behind the 3.8m bales per month needed to meet US Department of Agriculture projections for 2011-12.
"Most domestic mills have apparently gone from [working] six or seven days back to five-day weeks, and there are some mills that have taken a week down in the last month or two," Mr Stevens said.
And on export markets, there are doubts about demand from buyers other than China.
"It certainly looks more and more like the Chinese reserve might be the only buyer at the moment," Mr Stevens said.
At Commonwealth Bank of Australia, Luke Mathews trimmed price forecasts for cotton futures in the first two quarters of 2012 – by 2 cents to 98 cents a pound in the first quarter and by 5 cents to 95 cents a pound in the second – citing "sluggish export demand" which was fostering higher US inventories.
Also in Australia, hopes for supplies have been raised, with Cotton Australia, the industry group, saying the domestic cotton crop will jump by up to 1m bales to a record 4.5m-5m bales in 2012-13.
The rise will be fostered by increased sowings, expected to increase by 16% to 580,000 hectares, and enhanced irrigation following strong rains.