The easing of imported cotton costs is triggering a chain reaction across China's domestic cotton industry chain. On July 9, data showed that imported cotton offers at China's main ports declined across the board, with the SM index falling to 90.92 cents per pound, equivalent to a landed price of about 15,226 yuan per ton. Although this change seems small, the simultaneous 245 yuan/ton drop in the Zhengzhou Commodity Exchange's lead cotton contract suggests that market sentiment has shifted from wait-and-see to cautious bearishness.
Price Transmission: From Imported to Domestic
The decline in imported cotton quotes first affects the domestic market through a cost comparison mechanism. Taking SM-grade cotton as an example, its landed price has fallen below the average domestic spot price, creating a clear price inversion. This price gap encourages textile mills to prioritize imported cotton purchases, reducing demand for domestic cotton and forcing domestic spot prices lower. Industry public data shows that on July 9, domestic cotton spot offers began to show signs of loosening, with some origins' lint prices following the weakening trend.
More noteworthy is the change in open interest for the Zhengzhou Commodity Exchange's cotton futures. The lead contract 2609 saw a reduction of 34,680 lots in open interest, indicating that long positions are actively exiting. A rapid decline in open interest typically signals a lack of confidence in future prices, further reinforcing the downward price expectation. Historically, there is about a two-week lag between futures open interest and spot price changes, meaning domestic cotton spot prices may face greater downward pressure in the coming period.
Upstream and Downstream: Bearish Signals Amplify
The weakness in cotton prices is spreading downstream through cost transmission. Cotton lint, as a direct raw material, is most directly affected by the substitution effect of imported cotton. When imported cotton costs decline, the pricing power of domestic cotton lint processors weakens, making it harder for them to maintain prices. There are already signs that some lint traders are cutting prices to reduce inventories, which will dampen future purchasing momentum.
The impact on cotton yarn is more indirect but still significant. Weakening upstream cotton and lint prices mean that the raw material cost support for cotton yarn is loosening. Although yarn mills can adjust product mixes to buffer the impact, in the absence of a clear recovery in end demand, the decline in costs will only accelerate the price drop for cotton yarn. For weaving mills, this means purchasing strategies need to be more cautious in the short term to avoid building high-cost inventory during a price downtrend.
From an industrial belt perspective, ginning factories in major cotton-producing regions such as Shandong and Henan have begun adjusting their purchase quotations, with some even suspending purchases to wait for clearer market direction. In textile clusters like Jiangsu and Zhejiang, downstream weaving mills are generally adopting a just-in-time purchasing strategy, compressing inventory cycles to 7-10 days. This synchronized contraction upstream and downstream is forming a negative feedback loop that may further limit the space for cotton price recovery.