I. Zhengmian (China's Cotton)

(1) Bullish Factors

1) Currently, the epidemic is suppressing downstream consumption. However, with the epidemic easing in May and June, there will be another wave of consumption driving cotton replenishment.

2) Raw material inventories are at a historically low level, and rigid replenishment exists. The raw material inventories of yarn mills and fabric mills have fallen to the lowest level in the same period of history, so replenishment is inevitable.

3) Futures are trading at a discount to spot prices, and the possibility of a soft squeeze still exists. The current lowest spot delivery price is 22300-22500, and futures are still trading at a discount to spot prices. No one is willing to deliver warehouse receipts in the market, so the possibility of a soft squeeze still exists.

4) Ginning factories' repayment pressure is not high, and they still have the willingness to maintain prices. Upstream ginning factories have temporarily passed the repayment period at the end of March, and the repayment pressure of some factories has been temporarily relieved, so they have the willingness to maintain prices.

(2) Bearish Factors

1) Weak economic performance and insufficient consumer confidence. The PMI fell below the boom-bust line in March, and the decline in both new orders and new export orders indicates weak domestic and foreign demand, with the epidemic seriously dragging down the economy.

2) Insufficient downstream orders and accelerated downstream production capacity cuts. Due to insufficient orders and serious losses in immediate profits, yarn mills are accelerating production capacity cuts.

3) The speed of yarn mill inventory accumulation is accelerating, with inventory reaching a historical high. The traditional 'golden March and silver April' did not arrive, yarn mills' expectations were dashed, orders were insufficient, and finished product inventory increased by 2.7 days month-on-month to 34.6 days, the highest historical yarn inventory.

4) Serious losses in immediate profits, and high cotton prices cannot be passed on. The cotton price of 22500 cannot be passed on to the downstream, yarn mills are losing more than 1000 in immediate profits, and high cotton prices force yarn mills to stockpile less or even no raw materials.

5) The Xinjiang ban accelerates the outflow of orders. Southeast Asian countries have adopted an open policy towards the epidemic, and production and business activities in Southeast Asia are no longer affected by the epidemic. Coupled with the Xinjiang ban called for by the United States, this has accelerated the outflow of orders.

II. American Cotton

(1) Bullish Factors

1) Terminal apparel consumption has not turned around yet, it is still growing. US apparel retail sales hit a new high in February, and terminal consumption still has resilience.

2) The Russia-Ukraine war restricts the export of food and fertilizers. Fertilizer costs are rising, increasing cotton planting costs.

3) Undesignated quantities and net long positions by funds remain high. The total undesignated quantity is 145,000 lots, still at a historical high, of which May decreased by 8,000 lots month-on-month to 27,814 lots, while July and December increased by 2,500 lots month-on-month to 54,902 lots and 44,769 lots respectively. The net long position held by funds accounts for 36%, still the highest in the same period of history.

4) Shipping progress is accelerating, and US cotton futures inventories are low. US cotton contracts have been over-fulfilled, and the shipping progress has improved recently. If the shipping progress accelerates in the later period, the end-of-period circulating inventory of US cotton will be even tighter.

5) Drought in Texas may increase the abandonment rate of US cotton. So far, the drought in Texas and across the US has not eased, and it is still a severe drought. The abandonment rate in Texas is closely related to the weather.

(2) Bearish Factors

1) Personal income is declining, and subsequent consumer confidence is insufficient. US private net savings have fallen to pre-epidemic levels, and government subsidies provided to individuals during the epidemic have ended, and people's savings have fallen to pre-epidemic levels, leading to insufficient consumer confidence in the future.

2) The latest weekly contract of US cotton is only 15,800 tons, down 71% month-on-month. China and Pakistan have started to breach contracts.

3) Southeast Asian countries are suffering serious losses, reducing their demand for US cotton. Downstream industries in Southeast Asian countries and India can no longer afford high cotton prices, yarn mills' losses are increasing, and negative feedback is being transmitted, gradually reducing the market's demand for cotton.

4) Planting area will increase next year. At the end of March, the US Department of Agriculture released the cotton planting intention report, showing that the cotton planting area will increase by 9% year-on-year.

Summary: At present, on the macroeconomic front, the EU has decided to impose a new round of sanctions on Russia, Biden officially signed a bill on April 8 to cancel normal trade relations with Russia, and the minutes of the Federal Reserve meeting released a hawkish signal. In China, the COVID-19 epidemic has severely affected economic activity. On the macroeconomic front, the drivers of further inflation are weakening. From the perspective of the industry, there are no further upward drivers domestically or internationally, terminal demand is weak, the speed of production capacity cuts is accelerating, and downstream immediate profits are seriously loss-making. Upstream ginning factories still have the willingness to maintain prices, and they are unwilling to lower prices too much without major pressure. The supply and demand pattern of US cotton and Indian cotton is tight, net long positions by funds and undesignated quantities are still at high levels, but downstream profits are narrowing, and high cotton prices cannot be accepted. Cotton prices will still maintain a pattern of strong external and weak internal markets in the short term, but the willingness to maintain prices in the short term will lead to a fluctuating trend.

Points to Note: Changes in on-call, possibility of a squeeze