Polyester and cotton market connect fading due to seasonal trend?
Polyester and cotton markets connect has been robust in the global arena, but that seems to have fading in the first five months of 2018. While cotton prices have surged continuously, polyester prices moved flat although in a narrow range. However, both remained well connected with their roots that drive their individual markets. Cotton being a natural fibre, its availability and pricing is more dependent on climatic conditions prevailing wherever it is grown. On the other hand, polyester derives its strength and weakness from crude oil markets.
Whenever cotton output shrinks, prices start moving up rapidly and immediately to any news report that convey adversity. In cases, where the output is bumper, prices tend to moderate. In case of polyester, its output can be increased, although with a lag of atleast one year if new capacity is set up or in case capacities are idle, they are brought back into operation. Thus, production and thereby its availability can be control. Cotton completely misses this advantage.
Globally, fibre markets are divided into manmade fibre and natural fibre. In the 1990s, cotton accounted for two-thirds of global fibre distribution which has now declined to just one-third. And the rest is met by manmade fibres. This is because world demand for textiles have increased sharply, mostly for cheaper fibre textiles while cotton could not meet this incremental demand due to its inability to increase acreage and thereby the output. Adverse climatic condition also play truant on cotton outlook.
The fading connect between the two fibre is discerning if one looks at the market behavior over the past one-year (May 2017 to May 2018). Polyester prices averaged US$1.32 per kg for 1.4D in China with minimum value at US$1.08 per kg and maximum at US$1.43 a kg. That gives a spread of US$0.35 between the two and a year on year increase of 25%.
Similarly, if we decipher the cotton markets, considering two international benchmarks, US Cotton Futures an indicator for cotton pricing in future and Cotlook ‘A’ index, representing the spot market. Here, cotton futures clocked an average of US$1.69 a kg registering a year on year increase of 25.4%, with minimum value at US$1.47 a kg and maximum at US$2.09 a kg with a spread of US$0.62 between the two. This implies the flexibility and also the volatility of cotton prices when futures are considered. The same is tighter in spot benchmark. Cotlook A averaged US$2.43 a kg with minimum at US$2.34 a kg and maximum at US$2.61 a kg, leaving a spread of just US$0.27 between the two. It was even tighter than the PSF markets during the period as the increase was just 9% year on year.
Entering 2018, cotton prices continued to surge while PSF prices moved almost flat, implying no influence or disconnect to some extent. Cotton Futures gained 22% since February this year while PSF prices declined 6%. This reversal clearly explains that the latter has stopped taking cue from cotton markets off late. Nevertheless, seasonal trends in both the market gain significance when it comes to pricing. Cotton price tend to move up as availability shrinks as the marketing season approaches closer while polyester market enter a dull season.
