AKD Quotidian about — Cotton update: April’14

Karachi, April 10, 2014 (PPI-OT): USDA released its monthly cotton report for Apr14 yesterday. In this regard, USDA’S production estimates for MY2OI 3/14 (MY: Marketing Year starting August 1st) came off by a meagre 60k bales while global consumption estimates were revised upwards by 240k bales.

Global Inventory estimates have been revised to 96.92mn tons up by 170k tons with the US headed for the Lowest cotton inventory leveI since 1990/91.

That said China is likely to continue to impact global cotton prices where China’s revised cotton policy may result in a slight decline In global cotton prices next year. Within this backdrop, AKD Securities continues to advise caution in spinning plays while manufacturers with concentration in higher value added segments are likely to – less impacted by the increase in cotton prices and PkR appreciation as their raw material costs are not necessarily fixed far the higher value added segments as opposed to raw material costs in the spinning segment.

In this regard, NML continues to be AKD Securities Limited’s top pick and offers an upside of 11% to AKD Securities Limited’s Jun14 TP of PkRI37.5 /share.

USDA Cotton report key takeaways: USDA released its monthly cotton report For Apr’14 yesterday in this regard. USDA’s production estimates for My 2013(My Marketing year starting August 1st ) came off by a meagre 60k bales .This was despite a sharp 320k bale cut in the US production estimates in line with market expectations .The cut in US production was offset by increased production estimated in other countries including Brazil.

On the demand front, consumption estimated were revised upwards by 240k bales led primarily by a 500k bale uptick in consumption estimate for Pakistan, where the additional demand is expected to be met by a similar increase in cotton imported by Pakistan.
Global inventory estimated have been revised to 96.92mn tons up by 170k tons. 1mn bale increase in Chinese ending inventory and a simultaneous decrease in US inventory estimates by 300k bales imply that the US is headed for the lowest cotton inventory level since 1990/91.

China’s new policy in a bid to improve sales from its cotton reserve ,China recently revised the price of cotton to be sold from the state reserve to CNY17,800 /ton (US$ 1.31/lb)and reportedly increased the requirement for cotton import quota by increasing it to 4 tons of cotton from the state reserve for every ton of cotton.

The requirement last year was 3 tons of cotton for every of import quota, while the move is expected to stymie import demand from China and hence bring down cotton prices, the switch to a direct cotton subsidy (limited initially to be Xinjiang province) may result in a decline in Chinese cotton production from other province s, bringing down total Chinese production.

This was mitigate the impact of lower import demanded by China due to increase auctions from the Chinese states reserve and provided some support to cotton prices .

The cotton reference price has been set by the Chinese Government at CNY19, 800/ton 9US$1.46/lb) with this backdrop, AKD Securities continues to advise caution in spinning plays while manufacturers with concentration in higher value added segments are likely to be less impacted b y the increase in cotton prices and pkr appreciation as their raw material costs are not necessarily fixed for the higher value added segments as opposed to raw material costs the spinning segment.

In this regard, NML continues to be AKD Securities Limited’s top pick and offers an upside of 11% to AKD Securities Limited’s Jun’14 TP of PKR 137.5/share.

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