Commodities grappling with difficulties are finally feeling some relief thanks to stronger global growth, stabilization of the US dollar, and supply disruptions. Cotton is leading the pack in making up for these shortfalls. The fabric plays a key role not only in our everyday life but especially in the clothing, fast fashion, and retail sectors. It is also at the center of the ESG debate due to its high water absorption and performance, as well as biodegradability advantages compared to petroleum-derived fibers, which dominate the apparel industry. Cotton prices are driven by droughts and fires in Texas, the largest producer in the largest exporting country. Moreover, there’s a strong correlation with rising oil prices, which increase the costs of competing polyester. This correlation makes cotton an interesting substitute gauge for oil prices.
SUPPLY
India and China dominate in global raw cotton production, accounting for 47 percent of the total, but most of their production is used locally. The United States is the largest exporter of raw cotton, supplying 29 percent of the total, which significantly impacts the trade market. A quarter of this export comes from Texas. In addition, the United States is the largest importer of finished cotton products. Brazil is the second-largest exporter, with a whopping 26 percent share, where cotton is often grown as a rotation with soybeans. Raw cotton is then ground in countries such as Bangladesh, Vietnam, and China. Global supply is growing at a rate of about 2.5 percent a year, thanks to new cultivation areas in the Indian subcontinent and China and higher yields from GMO seeds, despite escalating water and labor issues.
DEMAND
Petroleum-based synthetic fibers such as polyester dominate the global clothing market, with a share of 70 percent (and still growing). This makes their relative price a key factor influencing cotton demand. Cotton maintains an average price premium of around $0.50/lb. It leads the natural fiber market, with an 80 percent share in clothing, mainly denim. The rest is mainly household items such as bed sheets and towels. Hence, consumer spending, especially on fast fashion products, is the main driver of demand. Due to cotton prices and sustainability issues, retailers such as Inditex (ITX.MC), H&M (HM-B.ST), IPO-awaiting Shein, and clothing stocks such as GAP (GPS) and Levi Strauss (LEVI), face serious challenges.
Ben Laidler, Global Markets Strategist at eToro
