China may not be the negative threat to cotton prices that
many investors believe, Morgan Stanley said, forecasting a further round of
stocks rebuilding which could raise inventories to the equivalent of 10 months'
Investors have trod warily over Chinese policy towards state
inventories since it rebuilt them to an estimated 4.4m tonnes, leading to record
imports besides the purchase of some 3.1m tonnes from last year's domestic
Indeed, the government is expected to begin selling down its
stocks, at 18,500 yuan ($2,900) per tonne, to support local mills facing
enhanced competition from low-cost countries – although, at some 200,000-300,000
tonnes the initial release is smaller than the 1m tonnes traders had expected.
However, China looks prepared further ahead to return to
stockpiling, to support the minimum support price of 20,400 yuan a tonne it has
promised farmers, well above a market price below 19,000 yuan a tonne.
The minimum support price, equivalent to 88 cents a pound,
is also well above the value of New York futures, which for the best-traded
December lot closed at 76.65 cents a pound on Wednesday, up 1.4%
on the day.
'In acquisition mode'
"For now, the Chinese National Cotton Reserve Corporation
remains in an acquisition mode," Morgan Stanley said.
"Local accounts suggest that the CNCRC is prepared to pick
up comparable quantities to last year's programme in support of the minimum
And already China "has demonstrated a willingness to
continue importing from the US", the top exporter, with advance orders from
America, at some 2m bales, the third highest in recent history.
"China's reserve purchases remain the largest bullish risk to this market, a risk we take very seriously."
'Don't bet against
In fact, the bank said it was "uncertain that China will
have the political will to support its minimum support price as strongly as
they did last year", noting that the reserve corporation has not committed to
However, even a smaller rate of stockpiling, of 6.7m bales
(1.5m tonnes), would be sufficient to trim US stocks at the close of 2012-13 to
28%, down from the US Department of Agriculture's forecast of 35.6%.
The stocks-to-use ratio, as a measure of the availability of
a raw material, is seen as a key indicator of price potential, with lower ratios
signalling higher values.
Global stocks of cotton may be "huge, but don't bet against
China", Morgan Stanley said, restating a forecast of cotton prices averaging 80
cents a pound in 2012-13, above the futures curve.
"After a meaningful downturn over the last five months, we
now see the risk-reward in cotton as more balanced."
The bank made this assessment despite cautioning that
investors may have become too downbeat over the threat of weather threats to 2012-13
India's weak monsoon was "unlikely to materially dent supply",
signals from planting rates indicated, while Chinese production prospects were "favourable",
despite heavy rains.
"While some of the recent weather has been severe, raising
concerns over the safety of the bolls, we see no reason why the USDA's forecast
of [a Chinese yield of] 1,204 pounds per acre should not be attainable."
In the US itself, Hurricane Isaac poses a "real" threat to
cotton output, with nearly one-quarter of the crop in the sensitive boll-opening
However, overall, conditions are "still adequate, if not
ideal for the US cotton crop".