India Revokes Cotton Export Ban After China Complains: Limit Down Open For "Widowmaker" Trade?

Tyler Durden's picture

If there was any confusion as to who calls the shots in the world, the following anecdote should provide some needed clarity. Hint: it is not the US. After last week India announced it would proceed with a Cotton export ban, two days ago China logged "a formal protest against India's ban on cotton exports amid signs that India is rethinking the ban that was implemented a few days ago." As a result hours ago India announced that less than a week after enacting said ban, it is now overturning it. Of course, there is the diplomatic snafu of just why it did, and for India it has to do with "protecting" the interests of its farmers, who "complained that, due to higher production this year, they were already suffering from lower prices than they had expected and needed to export to recover their domestic losses." Of course, the farmers' position was well-known before the ban overturn. What wasn't known is just how vocal China would be, as suddenly it would scramble to find alternative sources as it fills its strategic cotton reserve. Turns out it was quite vocal. And India, unwilling to risk a trade war with the world's biggest economic power, promptly relented. As a result, any and all commodity traders who bought up the widowmaker trade may find themselves staring into a limit down market post open.

From the FT:

The U-turn of the world’s second-largest producer of cotton comes as New Delhi tries to balance its relationship with Beijing, the interests of its farmers, and the concerns of its ailing textile industry.

 

“Keeping in view the facts, the interests of the farmers, interest of the industry, trade, a balanced view has been considered by the Group of Ministers to roll back the ban,” commerce minister Anand Sharma said on Sunday.

 

The abrupt move will add further volatility to the commodity after a rollercoaster two years in which prices first spiked from about 75 cents to an all-time high of more than $2 per pound only to crash to $1 per pound.

 

The wild price swings triggered a spate of contract defaults by farmers and textile mills, and losses for top cotton traders including Noble Group of Hong Kong and Glencore.

 

The price volatility has been so intense that traders have dubbed the fibre the “widow maker”, replacing natural gas, which earned the soubriquet after big bets went wrong in the notoriously volatile commodity in the 2000s.

Ironically, with the ban overturned, cotton prices are now likely set to plunge, especially if China does indeed halt wholesale accumulation.

Cotton prices are now likely to drop further below $1 per pound, analysts said, even if the threat of New Delhi reversing its decision once more could provide some artificial support.

 

Hussein Allidina, head of commodities research at Morgan Stanley in New York, said in a note to clients that prices could drop to 90 cents per pound due to weak global demand.

Then again, it is unclear if China is merely posturing when it says that it will tone down purchasing. If its crude oil import pattern is any indication, China is nowhere near close stockpiling in preparation for something big.

China had aggressively acquired bales over the past year for a government reserve as a way of supporting domestic farm prices and buffering against price volatility.

 

By late January, China had bought as many as 5m bales of foreign cotton for the reserve which, along with its domestic purchases, made up 15 per cent of global cotton consumption in the current crop year, the US Department of Agriculture estimated.

 

India said it has already exported almost 9.4m bales of cotton this fiscal year, higher than government targets.

Either way, China's gain is India's textile industry's loss.

Domestic textile companies have been complaining that they are losing competitiveness versus rivals in Bangladesh and Pakistan because of rising cotton prices in India. The ban was meant to push down cotton prices in the country.

At least this quick flip flop means that trades don't have to worry about the CME hiking margins on cotton. Unlike all other commodities. It also means that China will be delighted to buy up all the cotton at dumping prices that the world's producers care to flood the market with now that prices are set to slide.