Cotton futures help enterprises build "centenary enterprises"
From May 30th to 31st, the "2024 China Cotton Industry Development Summit Forum," hosted by the China Cotton Association and supported by the Zhengzhou Commodity Exchange, was held in Xi'an, Shaanxi Province. The theme of this forum was "Developing New High-Quality Productivity and Promoting Sustainable Cotton Development." Nearly 800 representatives from government departments, cotton industry organizations, cotton traders, textile companies, futures companies, and other units from both domestic and international attended the forum. They engaged in in-depth exchanges and discussions on topics such as developing new high-quality productivity in the cotton industry, promoting the optimization and upgrading of the industrial chain, green, low-carbon, and sustainable development, and high-quality development and risk management of the cotton textile industry, and analyzed the development situation of the industry.
01 Cotton enterprises have a need for risk management.
Chen Zuxin, member of the Party group and vice chairman of the board of directors of the All-China Federation of Supply and Marketing Cooperatives, stated in his address that to promote high-quality and sustainable development of the cotton industry, it is necessary to improve and strengthen the entire industrial chain, vigorously promote innovation, strive to maintain market stability, and adhere to open cooperation. He said that only with a stable market can there be stable expectations and stable business development. Stabilizing the market and prices requires the joint efforts of all parties. The entire industry should strengthen market analysis, price monitoring, and information exchange, and promptly submit policy adjustment suggestions to the state. Enterprises should operate steadily, strengthen risk awareness, and grasp the sales rhythm.
Gao Fang, president of the China Cotton Association, delivered a keynote speech entitled "Promoting High-Quality and Sustainable Development of the Cotton Industry with New High-Quality Productivity." She said that in 2023, the momentum of global economic recovery was insufficient, the international division of labor system was undergoing profound adjustments, and external risks and uncertainties were increasing. In the face of difficulties and challenges, China's cotton and textile industries seized the opportunities presented by the post-epidemic recovery of the domestic economy and the introduction of consumer stimulus policies, promoting the gradual recovery of the domestic market and the difficult recovery of the export market. However, the foundation for the stable recovery of the industrial economy is not yet solid, and we still face problems such as insufficient effective demand, insufficiently stable supply chains, and increasing pressure on enterprise costs.
Chen Minghong, vice general manager of China National Textile Import & Export Corporation, delivered a keynote speech on "Risk Management Needs and Practices of Cotton Textile Enterprises." He stated that enterprises face various risks in the production and operation process. For cotton textile enterprises, they may face compliance risks, cargo loss risks, quality risks, credit default risks, liquidity risks, contract performance risks, etc., but more importantly, market fluctuation risks. Cotton textile enterprises need to purchase cotton and then produce cotton yarn. Whether it is cotton price fluctuations or cotton yarn price fluctuations, it will bring risks to the enterprises themselves.
"As cotton enterprises, when conducting risk management, firstly, we must clarify our own business model and the main risks faced; secondly, we must confirm our own risk preferences; thirdly, we must develop market status assessments based on market information; fourthly, we must be familiar with and proficient in the use of relevant rules for financial derivatives; and fifthly, we must have highly targeted risk management strategies." Chen Minghong said that good market risk management can bring more opportunities to enterprises.
Chen Minghong introduced that the cotton industry currently mainly adopts the method of "locking the basis difference + futures." That is, when the spot price is not suitable, the basis difference is locked in advance to lock in the source of goods to meet the cotton demand for production. When the price is suitable later, opportunities are sought to determine the price to achieve final procurement settlement; or before the cotton demand is determined, hedging is purchased when the futures price is suitable. After the demand is clarified, the batch of cotton and the basis difference are determined, and the final purchase is completed.
02 Cotton futures have played a positive role in the entire industrial chain.
This year marks the 20th anniversary of the listing of cotton futures on the Zhengzhou Commodity Exchange. The launch of cotton futures has played a huge role in the entire cotton industry chain. Many enterprises have benefited from cotton futures financial derivatives, ensuring stable operation and long-term development.
At the "20 Years of Review and Prospect of Cotton Futures Serving High-Quality Industrial Development" roundtable forum, Chen Tao, former chairman of Beijing Luyidafu, as a participant in China's cotton futures since its initial listing, stated that whether it is from trading volume, holding volume, delivery volume, or even the application of option derivatives, China's cotton futures derivatives currently have a foothold in the international market, and China's cotton futures have their own independent market conditions and are very mature.
"Currently, all entities in the cotton industry chain highly recognize cotton futures. The hedging ratio of enterprises is increasing, and basis trading has become a commonly accepted tool or method in the market. The risk prevention function of cotton futures has been fully realized." Chen Tao said that low-risk hedging operations are often a basic principle that century-old companies must follow.
"The reason our company has survived to this day is mainly due to the cotton futures of the Zhengzhou Commodity Exchange. It is because of cotton futures that we have achieved the continuation of our company." This is what Wei Gangmin, chairman of Henan Tongzhou Cotton Industry Co., Ltd., said.
"We adhere to the business philosophy of taking service as the foundation, achieving industrial development in the process of development, from cotton planting to acquisition, processing to cotton trade, and then to textiles and clothing, completing industrial development. The entire development process is inseparable from cotton futures. We have carried out in-depth hedging, and the reason why the company has been able to reach where it is today is precisely because we have used the law of cotton futures price fluctuations to discover strategic opportunities for the company's steady development." Wei Gangmin said.
Ma Wensheng, chairman of Xinhua Futures, said that when cotton futures were first listed, neither the holding scale nor the trading scale was large. "After the 2008 financial crisis, in 2009, we discovered a phenomenon: after 4 trillion yuan of liquidity was invested in all agricultural products in China, they all rebounded sharply, but only cotton prices remained low. At that time, we conducted a systematic on-site investigation of cotton and found that the cotton industry chain was shifting and cotton production was significantly reduced. We concluded that the cotton market in 2009/2010 would be a bull market. We told many small and medium-sized cotton textile enterprises in Shandong that there might be a large-scale price increase opportunity for cotton, hoping that they would do hedging. Some of them bought hedging in advance, saving all their costs. This made us truly realize the great value that futures can bring to small and medium-sized enterprises." He said.
Ma Wensheng stated that the cotton industry chain is particularly long and complete, from upstream production to trade, warehousing and processing, and deep processing. Refined price management has become something enterprises must consider today. In the past, they considered the refinement, electronicization, and cost reduction of production processes, but today, if they do not consider refined price management, enterprises may not be able to sustain themselves. "Enterprises should attach importance to derivatives, because this is 'new high-quality productivity,' which can enable enterprises to transform and upgrade their operations."
Relevant officials from the Zhengzhou Commodity Exchange stated that the hedging and price risk functions of cotton futures are good. Up to now, the vast majority of large and medium-sized ginning enterprises and cotton trading enterprises have participated in cotton futures trading. Since its listing, the correlation between cotton spot and futures prices has reached 0.95. In the functional assessment of all markets and all varieties organized by the China Securities Regulatory Commission, cotton futures have reached Class A for five consecutive years.
For 20 years, Zhengzhou Commodity Exchange (ZCE) has been committed to serving enterprises, industries, and the national development. Since September 2017, ZCE has established 12 delivery warehouses in Xinjiang, following the trend of cotton industry's accelerated transfer to Xinjiang, serving the high-quality development of Xinjiang's cotton industry. Roughly estimated, 700,000 tons of Xinjiang cotton are hedged and sold through the futures market annually, mainly in the form of registered warehouse receipts. Since 2016, ZCE has launched 33 cotton "insurance + futures" pilot projects, helping to link poverty alleviation and rural revitalization. In addition, ZCE has built and developed multi-dimensional over-the-counter (OTC) businesses, such as OTC platform warehouse receipt buyback business.
The person in charge said that in the next step, ZCE will continue to optimize the rules and regulations system for cotton, help build a new high-quality productive force for the cotton industry chain, and serve the high-quality development of the cotton industry.
Leaders from Xiamen C&D Group visited Tongzhou for investigation and guidance
On March 3, Wang Yongqing, Vice President of Xiamen CNOOC Group, visited Tongzhou Group for investigation and guidance. Wei Gangmin, Chairman of our company; Huang Hongyu, President; Li Tao, Vice President; and Zhang Zhiyan, Director of the General Office, met with and participated in a symposium.
Tongzhou Cotton Market Brief, Week 1 of March 2025
1) This week's National People's Congress and the Chinese People's Political Consultative Conference (NPC & CPPCC) in China boosted market expectations for steady growth. In February, the Purchasing Managers' Index (PMI) for manufacturing stood at 50.2%, up 1.1 percentage points from the previous month, indicating a significant improvement in the manufacturing sector.
In 2024, China's dyeing industry saw rapid export growth to ASEAN and RCEP member countries, exceeding the overall export growth rate. However, this growth was accompanied by a decline in prices. From January to December, China's exports of eight major dyeing products to ASEAN totaled 7.908 billion meters, a year-on-year increase of 12.14%, 4.61 percentage points higher than the overall export growth rate, accounting for 23.58% of total exports. The average export price was US\$1.19 per meter, a year-on-year decrease of 2.75%, 0.64 percentage points lower than the overall decline. Exports to RCEP member countries totaled 8.431 billion meters, a year-on-year increase of 11.35%, 3.82 percentage points higher than the overall export growth rate. The average export price was US\$1.17 per meter, a year-on-year decrease of 2.79%, 0.60 percentage points lower than the overall decline.
On February 28, Mr. Huang Hongyu, President of our company, was invited to attend the 2025 Zhangjiagang Cotton Industry Development Conference and, as a guest speaker at the "Xiangshan Roundtable," shared his views on the cotton market and trading opportunities.
Henan Tongzhou Cotton Industry Co., Ltd.
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