In August, domestic and international cotton prices simultaneously hit their yearly peaks, but the market heat was not evenly distributed: overseas cotton gained more than Zhengzhou futures, compressing the price gap continuously. Behind this price structure shift lies a paradox: cotton imports doubled year-on-year in January-July, yarn imports rose 56%, while domestic spinning output fell 6.5%. These seemingly contradictory data points actually reveal a deep structural rebalancing underway in the supply chain.
Price and Spread: Stronger Overseas Signals Supply-Demand Mismatch
Both Zhengzhou and ICE futures set yearly highs in August, but overseas cotton outperformed domestic, narrowing the spread to a yearly low. This stronger-overseas pattern indicates tighter global supply-demand than in China, also reflecting the shift of textile orders to Southeast Asia, which boosts raw material demand abroad. For domestic mills, the narrowing spread means the cost advantage of imported cotton weakens, so purchasing decisions must focus more on exchange rate and shipping risks rather than chasing low prices.
The spread change directly affects downstream yarn pricing. When overseas cotton approaches or exceeds domestic prices, domestic yarn becomes relatively more competitive, but only if mills can digest high-priced inventories. In actual transactions, yarn prices struggled to follow the rally in August, prompting some mills to adjust their cotton blending ratios and increase use of chemical staple fibers—a substitution effect that will become more evident in the coming months.
Import Surge and Spinning Decline: Two Sides of the Same Coin
From January to July, cotton imports surged 100% year-on-year, and yarn imports rose 56%, while domestic spinning output fell 6.5%. The double increase in imported raw materials and yarn directly replaced part of domestic spinning capacity, especially in mid- and low-count yarns where imported yarn offers clear price and lead-time advantages. This led to order losses for small and medium spinning mills, forcing them to cut production or transform. This trend is particularly visible in traditional spinning clusters like Shandong and Henan, where some enterprises have begun shifting capacity to differentiated yarns or industrial textiles.
Another driver of the import surge is expectations about reserve cotton releases and quota policy adjustments. The market widely believes that to ensure stable cotton supply, policy tends to rely on imports rather than solely domestic planting. This expectation amplified futures gains, pushing Zhengzhou prices higher, but spot prices lagged, indicating limited downstream acceptance of high-cost raw materials. Spinning mills are squeezed between rising raw material costs and sluggish product price increases, with average processing margins near breakeven.
Export Growth and Structural Upgrade: Transformation Signals Under Pressure
While spinning output declined, textile and apparel exports grew 2.2% in January-July. Behind this modest growth lies a clear shift in export product mix. High value-added categories such as functional fabrics and home textiles grew faster than the overall average, while low value-added yarn and greige fabric exports continued to shrink. This indicates that China's textile industry is transitioning from volume-driven to quality-driven growth, with the contraction in spinning partially offset by efficiency gains in downstream weaving and apparel segments.
For exporters, rising cotton prices and RMB exchange rate fluctuations pose dual challenges. In the short term, hedging measures like locking forward exchange rates and using RMB settlement become necessary; in the long run, increasing R&D investment and enhancing product differentiation are fundamental responses to raw material price volatility. After August's cotton price spike, some foreign trade firms have begun negotiating price adjustment clauses with overseas clients, but actual implementation still needs verification through September order data.
Outlook: Spread Repair and Capacity Clearance in Parallel
Looking ahead to Q4, the domestic-overseas cotton spread is expected to gradually repair as more imported cotton arrives, but the process may involve domestic catch-up gains or overseas declines, adding uncertainty. For spinning mills, production cuts and transformation will remain the main theme, with the annual domestic spinning output decline possibly widening to around 8%. Meanwhile, cotton import growth will slow but remain high for the year.
At the industrial cluster level, Xinjiang, as the main cotton-producing region, continues to expand spinning capacity, but growth has slowed due to water and transportation constraints. Eastern coastal areas are accelerating upgrades to high-count yarn and melange yarn niches, forming a differentiated competition with imported yarn. Overall, this round of cotton price volatility is forcing all supply chain participants to rethink inventory management and sourcing strategies; the era of profiting from hoarding is over.