AKD Quotidian about — Cotton update: Dec13

Karachi, December 11, 2013 (PPI-OT): USDA released its monthly report on cotton yesterday.

According to AKD Securities, in this regard, the report largely confirmed market expectations of a reduction in production estimates over the last month where USDA cut its global production forecast for MY13/14 (MY: Marketing Year starting Aug’1) by 0.38mn bales from last month’s forecast to 116.83mn bales. On the demand side, global consumption forecasts remained flattish at 109.68mn bales for MY13/14 as compared to last month’s forecasts. Trade forecasts were revised downwards by 0.45mn bales on tighter supplies. This resulted in global ending inventory forecast of 96.41mn bales for MY13/14. While local cotton prices have come off by a significant 11% since the start of Oct’13 to clock in at PkR6,912/maund (Maund = 40kg) as cotton arrivals increased in the markets, cotton prices remain ~10% higher as compared to the same period last year.

USDA report key takeaways: USDA released its monthly report on cotton yesterday. In this regard, the report largely confirmed market expectations of a reduction in production estimates over last month where USDA cut its global production forecast for MY13/14 (MY: Marketing Year starting Aug’1) by 0.38mn bales from last month’s forecast to 116.83mn bales. Specifically, China’s production estimates were reduced by 0.50mn bales while Pakistan’s production estimates were increased by 0.3mn bales based on better than expected yield resulting in revised production forecasts of 32mn bales and 10mn bales, respectively. On the demand side, global consumption forecasts remained flattish at 109.68mn bales for MY13/14 as compared to the previous month’s forecasts. Trade forecasts were revised downwards by 0.45mn bales on tighter supplies.

This resulted in global ending inventory forecast of 96.41mn bales for MY13/14 a downward revision of 0.69mn bales where China’s ending inventory is forecasted at 57.31mn bales, 59% of global ending inventory.

Global Cotton Statistics
                                                             Forecast in
                                                         Nov-13        Dec-13
(mn bales)                         MY11/12   MY12/13E   MY13/14F       MY13/14
Production                         126.64     123.09     117.22         116.83
of which China                      34.00      35.00     32.50           32.00
Domestic Consumption               103.15     107.12    109.63          109.68
of which China                      38.00      36.00     36.00           36.00
Imports                             45.02      46.10     38.95           38.50
of which China                      24.53      20.33     11.00           11.00
Exports                             46.04      46.73     38.95           38.49
Ending Stocks                       72.89      88.06     95.71           96.41
of which China                      31.08      50.36     57.81           57.31
China as %age of global inven.        43%        57%       60%             59%

Source: USDA

since the start of Oct’13 to clock in at PkR6,912/maund (Maund = 40kg) as cotton arrivals increased in the markets, cotton prices remain ~10% higher as compared to the same period last year. Prices remain firm as compared to last year despite expectation of a larger crop this year due to higher expected demand for the commodity and depreciation of the PkR against the greenback. In this regard, local cotton is currently trading at a discount of 16% to Cotlook A Index. Higher cotton prices are likely to result in a decline in spinning margins going forward. Within AKD Securities’ textile universe, AKD Securities retains a preference for NCL and NML which offer upsides of 26% and 9% to AKD Securities’ respective target prices of PkR67.55/share and PkR127.00/share.