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Coronavirus epidemic likely to dampen global cotton consumption

Coronavirus epidemic likely to dampen global cottonHaving stabilised during most of February, international cotton prices collapsed during the end of the month and beginning of March as fears over the spread of Coronavirus (COVID-19) amplified during this period. The Cotlook A Index began the month on a modestly weak note as China markets returned from the Lunar New Year holiday with a steep downward turn. Though this index reached a high point of 78.30 US cents per lb, a renewed caution in the later part of the month further dampened spirits with several international events being postponed. This also affected business activities during the month as spinners did not commit themselves to large volume sales or purchases.

Despite many factories in China reopening, downstream sector remained sluggish impacting spinners’ orders and raising concerns over the potential of serious disruption to supply chains if the government failed to contain the virus in the next month or so.

Decline in prices boosts sales

However, a considerable decline in cotton prices during the last portion of February tempted buyers back to the market with a steep rise in demand from aCoronavirus epidemic likely to dampen global cotton consumption broad range of countries. Two consecutive weekly marketing-year high sales figures in the first half of the month also improved the pace of shipments.

Increase in government-inspired sales

On February 14, the ‘Phase One’ bilateral trade agreement came into force, a month after its ratification in Washington. The deal commits China to a substantial increase in purchases of US agricultural commodities, including cotton. Though the deal resulted in moderate new sales to China, it also led to a cancellation in few of the existing contracts. The deal is also likely to result in government-inspired purchases of US cotton being made by or on behalf of the country’s State Reserve.

In February, Cotlook published its tentative initial estimates of global production and consumption for the season ahead, in this case 2020/21. The starting point for its US production figure was the outlook for acreage as put forward by the National Cotton Council’s Planting Intentions survey. Its average yield and abandonment are anticipated in most states, meaning Cotlook’s second-largest crop of the last decade was worth more than 4.4 million tonne.

Coronavirus to impact consumption and production

Taking the above figures into account, Cotlook forecasts world production in 2020/21 to be just over 26 million tons, only marginally above the figure for the current season. Assessing the consumption outlook has been made more challenging this year by uncertainty regarding the duration of the Coronavirus outbreak and its impact on commercial and industrial activity not only in China but also in the rest of the world. For now, Chinese consumption can be estimated to recover to 8.3 million ton on the assumption that the disruption witnessed this season will have abated by the middle of this year.

Outside China, consumption will expand modestly in the Indian subcontinent and in certain Far Eastern countries. Global consumption in 2020/21 is likely to rise to 25.9 million ton. However, this optimism may prove misplaced if the worst fears regarding the economic impact of a global epidemic are realised.