Cotton’s great price unraveling continues

China imported 56,000 tonnes of cotton in February, down 65% year-on-year. Demand from China is slumping due to sluggish economic growth and increased competition from polyester. In fact China is expected to be overtaken by Bangladesh as the world’s top cotton importer in 2015-16. The US Department of Agriculture has forecast Chinese cotton demand, in the year to July 2016 at just 1.01 Mt, the lowest imports in twelve years.

Cotton futures prices tend to peak in March before trending down through the summer. However this year cotton prices are already down 8% at just over 58 cents per lb. Prices have fallen on concerns that China will release cotton from its stockpile (thought to be in the region of 11 Mt, equivalent to ~60% of global stocks) on to the market. An announcement is thought to be due by the end of March, with details like the price and the size of the sell still unknown. Cotton prices have also declined due to the fall in crude prices (energy accounts for around 40% of the cost of producing cotton and competes with polyester in textiles).

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The last person to catch a falling knife

Catching a falling knife is hard, especially when its covered in oil. Its hard when it covered in sugar too, just as painful if its made out of aluminium and cotton won’t do much to cushion its blow either.

But, the last person to catch it just right however gets all the glory and without getting their fingers burnt (or sliced off to use the analogy to the full).

As an excellent chart from Bloomberg illustrates several organisations have announced that oil prices have bottomed over the past 18 months including the IEA, various investment banks, oil companies and OPEC producers.

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A crude copy: 4 reasons why this could be a false dawn for oil prices

Yesterday Brent crude prices jumped by over 5% to over $40.50 per barrel, the first time the oil price has risen above $40 per barrel since early December and up more than 40% from its January low. But, could this be a false dawn for oil prices just like in 2015?

Loss of confidence in output freeze: Saudi Arabia, Qatar, Venezuela and non-OPEC member Russia agreed last month to freeze output at January levels, but only if others do the same. Russia’s energy minister has indicated that a meeting between OPEC and other leading energy producers could take place between 20th March and 1st April. However, the market could quickly lose confidence in the initiative, even if there is agreement. The key to an agreement taking hold will be Iran’s participation, but it is unlikely to want to cede acquiring market share now that sanctions have been removed. Recent isolated cuts to output (Iraq, Nigeria) were more to do with unrelated geopolitical than an attempt to actually control output.

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