In July, domestic cotton prices traced a 'surge-then-pullback' curve. The China Cotton Index (CCIndex 3128B) averaged 17,695 yuan/ton, up 15.2% year-on-year but only 0.8% month-on-month. Behind these seemingly stable figures lies a tug-of-war between reserve releases and Xinjiang capacity expansion. For textile mills, this means high raw material costs and sluggish finished goods destocking are likely to persist.
Supply Gap and Reserve Release
The reserve cotton release became a market focus after launching on July 20. By July 31, cumulative transactions reached 80,200 tons, with all listed resources sold. The average transaction price was 17,253 yuan/ton, equivalent to 17,871 yuan/ton (3128B grade), with an average premium of 1,638 yuan/ton. Early premiums were high, but gradually narrowed as sentiment cooled. This indicates that mills' reliance on reserve cotton stems not only from price but also from its strategic role in bridging the supply gap before new crop arrival.
Notably, some small and medium mills without sufficient import quotas turned to imported reserve cotton, paying higher premiums. This reflects structural issues in quota allocation. As the domestic-import price gap narrowed to 2,808 yuan/ton (after 1% tariff), the cost advantage of imported cotton weakened, yet some mills still paid premiums for quality foreign fiber.
Xinjiang Capacity and Weak Downstream
Xinjiang's yarn output grew against the seasonal downturn. In July, national yarn output fell 2.2% year-on-year and 5.9% month-on-month to 1.814 million tons, while Xinjiang produced 321,000 tons, up 17% year-on-year and down only 2.6% month-on-month. The westward capacity shift is not only boosting local cotton demand but also reshaping the national textile landscape: inland mills face order diversion and cost pressures, while Xinjiang enterprises maintain higher operating rates thanks to raw material and energy advantages.
However, end-demand has not recovered synchronously. July textile and apparel exports reached $28.79 billion, up 7.6% year-on-year but down 1.6% month-on-month. Cotton product exports fell 7.3% month-on-month to $5.99 billion, with shipments to the US and EU down 4.2% and 11.9%, respectively. Diversion of low-to-mid-end orders by Southeast Asian countries persists. Downstream mills show limited acceptance of yarn price hikes, squeezing profit margins.
Pre-New-Crop Price Expectations
The China Cotton Association projects 2026/27 national cotton output at 7.15 million tons, down 3.5%, while consumption is estimated at 8.92 million tons, up 1.7%. The supply-demand balance is shifting from surplus to tightness. The market broadly expects short-term price support and high seed cotton opening prices. Historical experience suggests high opening prices often lead to procurement risks—if downstream pass-through fails, ginners may face high-cost inventory pressure.
Internationally, the USDA August report cut global ending stocks by 326,600 tons, lowering the stocks-to-use ratio to 56.7%, intensifying supply concerns. The Cotlook A index averaged 88.9 US cents/lb, up 3% month-on-month, narrowing the domestic-import price gap. This raises import costs, but if domestic prices continue to climb, imported cotton will regain competitiveness.
Inventory Changes and Procurement Strategy
As of end-July, commercial cotton inventories stood at 2.5 million tons, down 19.4% month-on-month but up 14.1% year-on-year. Industrial inventories reached 888,000 tons, up 2.3% month-on-month but down 0.8% year-on-year. Accelerated commercial destocking results from reserve releases and trader clearance, while slight industrial restocking reflects selective bargain hunting. Overall, mills maintain low raw material inventories and just-in-time purchasing, reflecting uncertainty about future prices.