Cotton prices ‘vulnerable to another spike’


Cotton could be liable for a repeat of a July-type spike, and rubber may see further price grains too, that should not lull investors into thinking these two main industrial crops will follow the likes of corn and soybeans into sustained recoveries.

Rubber futures for January added a further 0.8% to 222.00 yen a kilogramme in Tokyo’s afternoon session on Tuesday, taking total gains for the benchmark lot to 8.0% from a near-three-year-low reached last week.

And prices may be “due for a short-term correction”, Macquarie said, given the pledge by Indonesia, Malaysia and Thailand, the top three exporters, to reduce shipments by some 300,000 tonnes, and cut down 16,000 hectares of trees to curtail shipments longer-term.

Thailand, the top rubber state, on Tuesday unveiled a further price support plan, proposing to spend 15bn baht ($476m) buying the commodity from domestic farmers, following an intervention scheme launched in January.

‘Lack of demand, ample supply’

However, while such action “may provide some support to the market for a while, for prices to make a more sustained recovery, we would need to see more robust industrial tyre demand”, Macquarie analyst Kona Haque said.

The comments echo those of Belgian-based Sipef, which owns rubber plantations in Indonesia and Papua New Guinea, and said last week over the pressure on prices from a “bleak” economic outlook.

“Off-take of natural rubber is seen as remaining weak until markets see signs of a recovery in China and in the other main industrial regions,” Sipef said, noting a “lack of demand and ample supply” of the commodity.

“As this recovery does not seem to be imminent, it implies that we foresee weak prices for the coming months.”

‘Short-term squeeze’

In cotton, Macquarie noted the potential for futures “to enjoy a potential short-lived rally, much as we saw earlier in July”, when prices of New York’s expiring July contract soared more than 25% in two weeks – only to lose all but a handful of these gains  in four trading sessions.

Cotton inventories held for delivery against New York contract have fallen by 96,000 bales since July to less than 40,000 bales, potentially creating the  conditions for a “short-term squeeze when the current [October] spot contract expires”, a process which will kick off late next month.

With exporters of US cotton signed up to some 4.4m bales in commitments, most for near-term shipment and domestic mills using some 300,000 bales a month, “some shippers may have difficulty in finding cotton for their commitments.

“Although there are ample stocks in other parts of the world, they are more expensive than US cotton.”

It is possible that commercial buyers “were too cautious in securing supplies when prices were falling and sales contracts were non-performing, and are now finding themselves with some holes to fill”, which would fuel a price rebound.

Price prospects

A repeat of July’s price spike could spell hardship for hedgers, forcing them to pay higher collateral on stocks of cotton which, on cash markets, may not rise as fast.

An extended version of this dynamic in 2008 prompted merchants Weil Brothers to quit the trade and Paul Reinhart to file for bankruptcy.

However, Ms Haque said that, longer-term, cotton prices look set to remain around current levels until at least the end of 2013, underpinned by the cost of production, typically a floor for a commodity’s price, but capped by huge world inventories.

“Prices will struggle to get back to 90 cents a pound during 2012-13, due to continued weakness in demand and hefty stockpiles.

“The higher cotton production in both 2011-12 and 2012-13 and the more long-term reluctance to switch back from man-made fibres as polyester and viscose prices maintain their competitive advantage will ensure prices remain at the 65-75 cents-a-pound range.”