While international cotton prices rallied on drought and El Nino expectations, domestic Zheng cotton futures struggled around the 17,000 yuan mark, narrowing the price gap by 547 yuan to 1,743 yuan per ton within a week. This figure reflects a direct clash between supply-side weather narratives and weak demand, signaling a profound shift in profit distribution across the textile chain.
Weather Premium vs. Policy Balance
NY futures surged 3.67% on August 27 to 92.75 cents per pound, the highest since April 2024. US cotton crop conditions deteriorated for the fifth consecutive week, with good-to-excellent ratings at 37%, while drought-affected areas expanded from 44% to 52%. The probability of a 'very strong' El Nino exceeding 90% further fueled the weather premium. A weaker US dollar amplified gains, with the international cotton index (M) rising 4.3% in yuan terms.
Domestically, Zheng cotton's weekly average settlement price only inched up 0.7%, spiking to 17,345 yuan/ton on August 28 before retreating. Reserve sales maintained a 100% transaction rate, with cumulative sales exceeding 240,000 tons, alleviating short-term supply tightness. New crop arrivals are expected earlier, with some machine-picked fields already 40-50% open.
Profit Divergence: Chemical Fibers Surge, Apparel Struggles
National Bureau of Statistics data shows industrial profits up 17.6% year-on-year from January to July, but textile industry profit growth slowed sharply from 16.6% to 7.9%. Textile and apparel profits remained in contraction at -17.2%, though improving from -28.0%. In contrast, chemical fiber manufacturing profits surged 107.7%. This 'hot upstream, cold downstream' pattern indicates a breakdown in cost transmission—upstream chemical fiber producers capture most profits due to strong pricing power, while weak apparel demand squeezes processing margins.
For textile mills, cotton price increases are not passing through to yarn prices. Domestic C32S combed yarn averaged only 0.1% higher this week, while imported yarn rose 0.7%, creating a rare inversion where domestic yarn is 46 yuan/ton more expensive than imported yarn. This price rigidity suppresses raw material purchases, especially amid unclear peak season demand.
Policy Variables and Peak Season Game
The US is considering an additional 7.5% tariff on Chinese goods, which would push combined tariffs on Chinese textile and apparel exports to between 20% and 37.5%. If implemented, this would weaken Chinese competitiveness in the US market. Fed Chair Warsh's hawkish Jackson Hole remarks raised rate hike expectations, tightening financial conditions and pressuring commodity prices.
Domestically, a survey at the Shanghai Yarn Expo (August 25-27) showed improvement from last month but far below spring levels, with orders diverging and sentiment cautious. While high temperatures in Xinjiang have eased, production cut expectations remain unverified. In this window before new cotton arrives, weather and policy will be key price drivers.