|(United States Of America)|
Just when it felt like the market was getting ready to challenge major support below 82 cents, a late session rally lifted values back into the ‘comfort zone’. It is not clear what prompted the buying of some 2’500 December near the close, with potential reasons ranging from the lifting of hedges against export business to rumors about China’s Reserve sales policy.
China was an active buyer this week, as mills were trying to fill newly issued quotas, rumored to be in excess of 250’000 tons, that require cotton to be imported before the 20th of December. With prompt availability being one of the main factors, buyers considered a wide variety of high grades from origins like Greece, Mexico, India, the US, Australia, Spain or Brazil, and prices paid were in the mid 90s.
This latest round of Chinese buying has further reduced the remaining old crop inventory, both at origin and on consignment in China, and with new crop arriving slower than normal this season, we have yet to see any supply pressure.
Some traders begin to question whether we will see much crop pressure at all, because China continues to import at a decent pace and many other markets still have plenty of holes to fill, while the US and India have already committed sizable volumes that they need to cover first. In other words, it may take a while before the pipeline fills up to level at which there is excess supply to pressure the market.
The pace of Chinese imports remains the main price driver in our opinion, with China currently expected to more or less absorb the production surplus of around 11 million bales in the rest of the world. This week we learned that China imported 925'000 bales in September, which brings the total for the first two months of the season to 2.13 million bales, which equates to an annualized pace of 12.8 million bales.
Considering that mills just received a batch of quotas of over a million bales and that there will be another TRQ (Tariff Rate Quota) of 4.0 million bales issued in early 2014, imports of 10+ million bales seem certainly within reach.
The Certified Stock continued to grow this week and as of this morning it measured nearly 95’000 bales, including bales under review. One has to wonder why this cotton, most of which consists of 3135 and higher grades, is not being moved to China given their appetite for ready to ship imports.
Maybe the reason is that merchants prefer to use it as a tool to force carry into the market, which seems to be working, since the Dec/March spread has gone from a 300-point inversion to more than 100 points carry over the past couple of months. However, we wouldn’t rule out a sudden disappearance of this certified stock just yet!
Yesterday the US government finally ended its shutdown by kicking the can further down the road, hoping to find a resolution to the debt issue over the next couple of months. It will still be several days before the USDA and CFTC are up and running again, so we will have to wait a little longer before we get updated export and commitment of traders data.Despite all the negative local and international press the US is getting these days, there are a number of positives for the US economy going forward. Who would have thought a few years back that US oil production would rise to a 20-year high of 7.5 million barrels a day in 2013, thanks mainly to large-scale oil shale exploration in North Dakota and Texas. This upward trend in oil production is likely to continue and forecasts call for up to 9.5 million barrels/day by 2015, close to the record 9.6 million barrels/day of 1970.
If natural gas liquids and biofuels are added to crude, then the US will become the world's biggest producer of liquids in 2013 with 12.1 million barrels/day, ahead of Saudi Arabia and Russia. Including other energy sources such as natural gas, coal, solar and wind, the US is currently meeting 87 percent of its energy needs and is on its way to become energy independent. With Canada added to the equation, it is already there! By contrast, the EU produces less than 50% of its energy needs and dependency on crude oil imports is at over 80% and for natural gas it is over 60%.
This US energy boom has far-reaching economic and geo-political implications. With US oil imports at just 40 percent of 2005 levels, the US trade deficit is improving rapidly and the fact that the US can offer cheaper energy to companies than other countries is bringing some manufacturing back to the States, especially since labor arbitrage is less of a factor these days in view of improved automatization and robotics. Definitely something to consider before getting too negative on the US economy and the dollar!
So where do we go from here? Prices are still in a long-term sideways trend, with long and short-term moving averages basically flatlined, volatility at a multi-year low and momentum almost nonexistent. As long as China keeps absorbing the surplus in the rest of the world, stocks outside China won't change much and the market may therefore not have a lot of wiggle room going forward.
Looking out for potential game changers, a Chinese policy shift is still on top of the list, although we don't think that it would necessarily have to be bearish like most analysts believe. Weather is still a factor at this point, although harvest conditions have been surprisingly benign so far and time for something bad to happen is soon running out. All things considered we currently see no reason for the market to break out of its boring sideways trend.
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