The first week of China's state cotton reserve auctions saw all offered lots sold, with an average premium of 1,638 yuan per tonne. This bidding frenzy stands in sharp contrast to a 5.9% month-on-month decline in national yarn output. The July report from the China Cotton Association reveals a core contradiction: it is not strong demand driving raw material purchases, but structural tightness on the supply side forcing mills to lock in resources early.
Structural Anxiety Behind Hot Reserve Auctions
State reserve auctions began on July 20. By month-end, 80,200 tonnes had been sold at an average price of 17,253 yuan per tonne, equivalent to 17,871 yuan per tonne for the 3128B grade. Small and medium-sized mills lacking import quotas treated imported reserve cotton as their only viable channel to obtain foreign fibre, bidding more aggressively than larger firms.
What does this mean? Uneven quota distribution is reshaping how mills source raw materials. For factories without quotas, reserve auctions are the sole window to access imported cotton, even at a premium. However, as auctions continued, sentiment gradually rationalised and premiums narrowed.
From a regional perspective, Xinjiang's yarn output rose 17% year-on-year to 321,000 tonnes, diverging from the national 2.2% decline. Textile capacity continues to cluster in Xinjiang, driven by local raw material conversion advantages and rising costs in central and eastern regions.
Narrowing Price Gap and Export Order Diversion
Domestic cotton prices spiked then retreated in July. The CCIndex 3128B monthly average was 17,695 yuan per tonne, up 15.2% year-on-year. Early-month drought in Xinjiang fuelled减产 expectations, pushing prices higher, before reserve releases eased supply pressure.
Internationally, the Cotlook A index averaged 88.9 cents per pound, up 3% month-on-month. After 1% tariff conversion, international cotton was 2,808 yuan per tonne cheaper than domestic, with the gap narrowing by 221 yuan from June.
What does a narrower price gap mean for buyers? Foreign cotton's cost advantage has diminished, dampening import enthusiasm. July cotton imports fell 16.6% month-on-month to 92,000 tonnes. Australian new cotton arrivals surged, raising its share to 59.8%, up 31.9 percentage points from June. This shift reflects a preference for stable quality and controllable shipping cycles.
Export pressure is more direct. 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 EU down 11.9% and to Belt and Road countries down 8.9%. Order diversion by Southeast Asian nations continues, and trade policy volatility has slowed order intake.
Price Expectations and Inventory Dynamics Before New Cotton Arrives
The China Cotton Association forecasts 2026/27 national cotton output at 7.153 million tonnes, down 3.5% year-on-year. Planting area fell 3.9% to 43.07 million mu, while yield per mu edged up 0.4% to 166.1 kg. Xinjiang output is estimated at 6.857 million tonnes, down 3.5%. The Yellow River basin saw yield rise 2.6%, but the Yangtze basin's output fell 14.3% due to excessive rainfall.
With output declining and demand expected to rise, the market widely expects short-term price upside, and seed cotton opening prices are likely to be high. For mills, this means raw material costs are unlikely to fall significantly before new cotton arrives, keeping margins under pressure. July's domestic 32-count pure cotton yarn averaged 23,328 yuan per tonne, up 13.33% year-on-year but down 0.04% month-on-month. Yarn price increases are struggling to gain traction as downstream buyers resist higher quotes.
Inventory data warrants attention. End-July commercial cotton stocks stood at 2.5 million tonnes, down 19.4% month-on-month but up 14.1% year-on-year. Industrial stocks rose 2.3% month-on-month to 888,000 tonnes. While commercial destocking accelerated, the slight industrial restocking suggests some mills replenished modestly after depleting cheaper materials, remaining cautious about the outlook.