Interview with Axel Trede, board member of the Bremen Cotton Exchange and Managing Director of the cotton retailer Cotton Service International .
Cotton prices have been falling steadily since February. This can be seen in the Cotlook A, the New York Futures and in the performance of the CIF Bremen, which are all essential benchmarks for the market. The Cotton Report editorial team discussed the background and influencing factors with Axel Trede, board member of the Bremen Cotton Exchange and Managing Director of the cotton retailer Cotton Service International. It seems reasonable to suspect that the corona crisis could be the cause.
Cotton Report: Mr Trede, where are the causes of the currentlyfalling cotton prices to be found?
Axel Trede: Following the increase in cotton prices from October 2019 toFebruary 2020, the negative price development in recent weeks is solely aresult of the corona crisis. It is an expression of current fears that amassive drop in consumer demand will have a significant impact on the entiretextile chain. This is leading to falling prices. This trend can also be seenon the stock exchanges and other commodity markets.
Is the current price level partly due to the long-term consequences of the trade dispute betweenthe USA and China? Do Chinese Stocks still influence the current price level?
No! In terms of prices, the tradeconflict between the two major cotton powers has already faded into thebackground. We saw that prices recovered towards the end of the conflict. Itremains to be seen whether any winners or losers can be defined from thisdispute. The fact is that China has ordered more cotton from the United Statesin recent weeks. In addition, it was primarily a bilateral dispute which, inaddition to great uncertainty, led to distortion in the textile chain. Comparedto the trade dispute, the corona crisis is a pandemic with serious consequencesworldwide. Moreover, cotton stocks in China are no longer a decisive factor interms of price – they are at a level that can easily be dealt with by theChinese government.
What economic effects of the corona crisis are causingconcerns for the market on the production side?
A low price level will deter cottonfarmers from growing cotton fibre for the next season if they have anopportunity for alternative products such as soya bean, corn or other cereals.The decision on what to grow will be made in the northern hemisphere in thecoming weeks and it will be interesting to see how farmers choose. Asignificant reduction in cultivation can lay the foundation for a pricerecovery in the foreseeable future.
How is cotton consumption developing against the backdrop ofthe corona crisis?
As all of us can probably appreciate,the signs are not currently pointing to ‘consumption’. Of course, this alsoapplies to textiles. At the retail level, there is the threat of massive lossesin sales in affected countries as a result of the strong market restrictionswith shop closures and bans on contact to reduce the risk of infection. Thereis therefore a risk to the functionality of the marketing system. In contrastto long-term consumer goods such as cars or machines, fashion is a seasonalcommodity or, in a manner of speaking, a ‘perishable’ good – summer fashion isno longer saleable in the winter months. Revenues are being lost and it will beimpossible to offset these to the same extent in the future. Many retailers andbrands are therefore cancelling current seasonal orders due to the fear ofliquidity problems and a lack of demand, which in turn is having a significantimpact on production in spinning and weaving mills and textile and clothingmanufacturers in the European producer countries, as well as primarily in Asia,a major consumer of cotton.
How long will the crisis last?
Of course, this is not exactlyforeseeable – but alongside many incalculable factors and effects, the cause isfortunately finite. A vaccine will be available in the foreseeable future andattempts are being made in various countries to limit the massive economicconsequences, which are acute for many people, with substantial aid programmes.Markets are expressing expectation, but not reflecting the current state. Inthis respect, we can still expect very fragile market conditions as long asthere is great uncertainty. However, the markets will react earlier, as soon asthe first light at the end of the tunnel becomes visible.