COTTON STILL FAR FROM MAKING HISTORY...

It is quite interesting to note that the prices of cotton in New York hit high of $1.1198 per pound on 15^th Oct which of course was the high back in 1995. But it is yet far from making historical high. Back in the 1800s America was the leading exporter of cotton and essential for the economy of Europe. During the American civil war back in 1860s America south used to supply 77% of 800 million pounds of cotton consumed by Britain. During those times the British Empire declared neutrality in the American civil war, and this diplomacy created 2.5 million bales of cotton being burned to create shortage to exports to Europe. So the exports of 3 million bales were cut to mere thousands. This made the prices to soar to the highs of $1.89 per pound in 1863-1864. This made the British turn to India, Egypt and Brazil for their deficit in cotton supplies.

Coming to the present scenario, lot of emphasis is being given on the supply deficit and the stock to use ratios. This month the USDA reduced their estimates for 2010/11 ending stocks by 772000 bales (0.169 metric tones), and cutting the world production estimates by 273000 bales (0.059 metric tones) from 117.0 million bales (25.47 million Mt. Tones) to 116.7 million bales (25.41 million Mt. tones). The USDA has been estimating that the Chinese production would be cut by 15% compared to 2007/08 levels to 6.9 million Mt. tones. India, to much extent will be balancing this deficit with production of around 5.7 million Mt. tons compared to 5.1 million Mt. tones in 2009/10. To be very true BT- cotton has turned the total scenario of India’s cotton production (keeping aside the controversies). The main trigger for the recent spurt in cotton is the ending stocks of world and to a large extent China. The world ending stocks have been estimated to be around 44.7 million bales (9.73 million Mt. tones) compared 46.7 million bales (10.17 million Mt. tones) back in 2009/10 and China ending stocks at 14.7 million bales (3.20 million Mt. Tones) compared to 18.2 million bales (3.97 million Mt. tones) in 2009/10.

If the consumption side has to be considered then there has not been any increase in the consumption over last 3 years. If the world consumption figures have to be considered then they stood at 27, 26.9, 23.9, 25.6 million mt. tones in 2006/07, 2007/08, 2008/09, 2009/10 respectively. The 2010/11 consumption has been estimated to be 26.3 million metric tones in 2010/11, which is actually a decrease of 2.6 % compared to 2006/07 levels of consumption. Over the years the consumption and the production are very much balanced with very few variations except in the levels of ending stocks which stood at 13.5 million mt. tones in 2006/07 and current estimated at 9.7 million mt. tones.

Statistics reveal that consumption of cotton has reduced because of the shortened summers in the west. With the cold becoming longer and severe the demand of cotton is slowly declining. The short summers do not encourage any spurt in the demand for cotton fabrics, except for the eastern tropical countries.

Looking at the ending stocks sorry state the world is eyeing India the second largest exporter to fill up the stock deficit. India has already postponed the fiber exports registration to Nov 1^st as against Oct 1^st earlier. With Indian fiber exports requiring registration for exports, the Office of Textile Commissioner reported that all the 5.5 million 375 pound Indian bales available for exports have already started the registration process. The export from U.S has increased to 3.4 million mt. tones (estimated) from 2.6 million mt. tones in 2009/10. Australian exports have increased from 0.54 million Mt. tones in 2009/10 to 0.61 million Mt. tones this year. Even Argentina has increased its exports by 54% to 43544.87 mt. tons this year. These minor exports are somehow maintaining the balance in the demand and supply chain.

Right now the government policies will be eyed continuously for any further spurt in prices. Rests the economics of supply and demand are pretty much balanced.

CRUDE OIL IN DIRECTIONAL CRISIS...

Crude oil prices have been recently facing some directional crisis for months now. Some significant facts over why this is happening.

Demand:

1. China’s demand surged by 8.5% by the end of August 2010. The pricing mechanism of China made hoarding of stock very rampant, as the country had a system of aligning their benchmark crude oil prices with basket of international crude, if the prices fluctuate more than 4% over consecutive 22 days. The coming rise or fall in the domestic prices could be easily gauged by the traders. Now under the new proposal (pending implementation) the period will be halved thus discouraging the hoarding.
2. India’s demand for petrol has increased by 11.4% mainly due to 33% increase in monthly car sales as on august 2010. Diesel just showed a demand growth of 3% because good monsoons and less power outages.
3. Demand in North America rose by 2.6% year-on year in august 2010. There have been no significant reasons for this minor surge in demand.
4. Iran’s gasoline imports reduced significantly by 15% due to the new sanctions imposed, and also due to rationing of gasoline followed by reduced subsidies on gasoline prices. Iran has been producing gasoline itself, but at the cost of other petrochemicals that it produces and export which in the long run will hurt its economy on both sides.
5. Europe showed a demand surge of 2.7% in august 2010 compared to last year. This surge can be contributed to continuous demand from Germany and France for heating oil for their coming winter demand. Germany in particular increased its heating oil deliveries by 114%.
6. Japan’s overall demand rose by 4.7% and that of Korea by 6.6%. This demand was mainly because of warm weather conditions, which surged the power demand for air-conditioning.

Supply:

1. Global oil supply has decreased by 150 Kb/d to 86.9 Mb/d as on September due to lower non-OPEC output.
2. Iraq this month announced an upward revision of 25% in its crude oil reserves to 143 billion barrels. Its exports have also increased to 2.52 mb/d since the coalition’s invasion in March 2003.
3. Iran’s crude oil output reduced to 3.68 mb/d. Iran has crude in floating storage of around 33 mb which no doubt is 17mb less compared to last year around this time. With the sanctions in place the refiners and traders are not able to arrange for bank finance and insurances, Iran still manages to sell its cargo shipments to certain European companies at really steep discounts. Also to note that China has increased its imports of Iranian crude oil taking advantage of their steep discounts as the country is reeling under economic turmoil due to sanctions.
4. Russia which does not allow access to oil fields except to state owned oil companies has been sending feeler that it may allow foreign companies access it oil and gas resources. The decisions are yet to be finalized. It is also very keen on starting its offshore development in Arctic and Barents Sea.

With all these facts in place crude oil has yet to set a directional move. A close watch on prices will give some convincing results over some days to come.