Turkish Lira Hits All-time Low, ICE Cotton Sees Short Decline

Recently, the sharp depreciation of Turkish Lira is highly discussed by the market participants, and in the meantime, U.S. announced to double steel and aluminum tariffs on Turkey, leading to panic mood on the market in short run. Turkey ranks second or third place on U.S. cotton export destinations, with yearly volumes of about 400kt. The worries over the decrease of cotton imports from Turkey lead to the slump of ICE cotton futures in early this week. However, the market has started to recover as the depreciation of Lira is not built in one day. 

Since 2000, Turkish Lira has been volatile and recently, the continual firmness of USD stimulates the depreciation of Lira further. The collapse of Lira against USD and U.S. doubling steel and aluminum tariffs on Turkey makes Turkey under panic sentiment overall. Turkey has good development in travel and agricultural industries, but for its industry, especially in the heavy industry, it has no supportive industry, and the industrial chain is incomplete, so it triggers the worries on its economic development and cotton textile market players also doubt about its cotton consumption. 

According to statistics, cotton consumption of Turkey has moved up quickly, with growth rate averaged at 4% in five years. However, its domestic planting areas and output witness no apparent increase, and the output stabilizes at 700-900kt. And the supply gap is fully fulfilled by the imported cotton, and the depreciation of Lira makes the higher imported costs. Yearly cotton consumption is about 1.30-1.60 million tons, and the cotton yarn exports are only 140-170kt, and for the cotton yarn with 85% proportion of cotton, exports are only 110-130kt, so the large amount of cotton products is consumed by its domestic market. Therefore, the sharp depreciation of the currency is bound to see large rise of imported cotton prices shortly, and the cotton imports are supposed to decrease in recent months. 

In particular, U.S. announces to levy higher tariffs on imports from Turkey, imposing a 20 per cent duty on aluminum and 50 per cent duty on steel, which poses significant impact on U.S. cotton imports. Among Turkey’s cotton imports, U.S. cotton takes a half, followed by Central Asian and Greek cotton. However, as Uzbekistan decides to reduce cotton exports, imports from Uzbekistan are likely to decrease after 2018 and U.S. cotton is an alternative. But with the depreciation of the currency and the trade war, cotton imports are expected to decrease. 

The large depreciation of Turkish Lira and escalating trade friction between Turkey and U.S. is bearish for ICE cotton futures. Turkey takes a second or third place in U.S. cotton export destinations, with yearly imports of 400kt. If Turkey decreases U.S. cotton imports, U.S. cotton consumption is expected to reduce. Meanwhile, cotton trade between U.S. and China is also at freezing point. Originally, yearly imports of China is about 500-600kt, and now, the additional tariffs lead to the difficulty in U.S. cotton imports. Therefore, the 0.9-1 million tons of U.S. cotton exports are uncertain. Moreover, affected by the devalued Lira, currencies from other emerging markets also see depreciation. On Aug 13, exchange rate of Indian Rupee against USD hit a low. Emerging markets are the major export destinations of U.S. cotton. Currently, the U.S. government’s action has led to the volatile exchange rate in the world, and market players worry about the US cotton exports. 

In terms of Turkey’s U.S. cotton sales, the volumes in 2017/18 are flat compared to last season, and by Aug 2, the trading sentiment is tolerable. Pay attention to the USDA’s weekly report this Thursday, to see about the sales condition of emerging markets. 

The sharp depreciation of Lira is not favorable to imports in short run and currencies of other emerging markets are also impacted, bearish for ICE cotton futures. When the market returns to rational, ICE cotton futures market is expected to keep firm.