The current "high" cotton futures prices are "unsustainable",
Australia & New Zealand Bank said, cautioning over softening cash markets
and the likelihood of growing competition in China from artificial fibres.
The bank recommended investors place a short bet in December
cotton futures, with a target of 74 cents a pound – 9% below the contract's
price on Tuesday – warning that "all roads lead down" for prices.
While cotton futures have shown strong gains this year -
lifted by factors including reduced ideas of last year's US crop and the
knock-on effect of rising prices of alternative crops such as corn ahead of the
northern hemisphere spring sowing season – the rally appears "unsustainable"
given waning demand in Asia for the fibre.
"Demand at the yarn and fabric stage of the cotton pipeline
is reported to be weak across much of Asia," said ANZ analyst Paul Deane, highlighting
a fall of 6% in raw cotton cash prices so far this month.
Cotton vs polyester
This decline in use was coming against a background of
increasingly competitive values of artificial fibres, with prices of purified
terephthalic acid (PTA), the building block of polyester, falling 4% in China
in the past two months to a three-year low.
"The widening disparity between cotton prices and [values
of] synthetic fibres does not bode well for cotton prices to sustain current
levels," Mr Deane said.
Indeed, cotton is unlikely to retain the appeal to hedge
funds it has held over the past five months, during which they have raised
their net long position in ICE futures and options from below 5,000 contracts
to a late-March high of more than 68,000 lots.
"Speculative funds have been a key driver of prices over the
first quarter of 2014, but this segment of the market is unlikely to provide a
further impetus to prices in the months ahead."
'A sell above 80
Already, there appeared to be some sign of market fatigue in
the "inability of cotton futures to rally" after the US Department of Agriculture last
week cut its estimate for domestic production last year by 320,000 bales to 12.9m
bales, following surprising weak ginnings data.
The lack of price movement "indicates a major new catalyst is
needed to drive prices higher".
However, with the revised subsidy policy in China, whose
previous regime has left it amassing huge inventories of the fibre, likely
undermining values, by opening up the world market to its "very poor underlying
fundamentals," December cotton futures are "a sell above 80 cents a pound", Mr
ICE cotton for December stood at 81.43 cents a pound at 08:00
New York time (13:00 UK time), up 0.6% on the day.
The best-traded July contract was 0.3% higher at 92.51 cents