Domestic cotton prices experienced a rally-and-retreat pattern this week. The main contract of Zhengzhou Cotton Futures averaged 16,205 yuan/ton, up 106 yuan/ton or 0.7% from the previous week, hitting a multi-month high during the session before retreating on reserve release speculation. The China National Cotton Price B Index averaged 17,739 yuan/ton, up 96 yuan/ton or 0.5%. This suggests that support from commercial inventory drawdown is being offset by policy expectations, with market sentiment shifting from optimism to caution.
International Cotton Breaks 80 Cents on Geopolitical Risks
International cotton prices showed stronger momentum. The main contract of NY Cotton Futures averaged 80.49 cents/lb, up 3.44 cents/lb or 4.5%, reclaiming the 80-cent mark. The International Cotton Index (M) averaged 87.94 cents/lb, up 2.68 cents/lb or 3.1%, translating to an import cost of approximately 14,533 yuan/ton under a 1% tariff. The domestic-international price spread widened to about 3,206 yuan/ton, making imported cotton less competitive versus Xinjiang cotton and potentially curbing import demand while supporting domestic prices.
Geopolitical tensions were the key driver. The U.S.-Iran conflict escalated, with the U.S. reinstating sanctions on Iranian oil, pushing oil prices higher and fueling global inflation fears. Meanwhile, the U.S. Trade Representative held hearings from July 7-10 on proposed tariffs on over 60 economies, and the 10% universal tariff under Section 122 of the Trade Act of 1974 faces an adjustment window in late July. Amid dual uncertainties, U.S. companies accelerated restocking; Reuters data showed U.S. container imports rose 8.2% year-on-year in June, with imports from China surging 27.4%, partially front-loading future demand.
Supply-Side Risks: U.S. Crop Conditions Worsen, India Faces El Niño
Supply uncertainties persist. USDA data showed U.S. cotton crop conditions at 46% good-to-excellent as of July 5, down 2 percentage points from the prior week and 2 points below last year. Texas continues to experience hot, dry weather, stressing dryland cotton. The intensifying El Niño could disrupt India's monsoon, threatening cotton yields. Brazil exported 217,000 tons of cotton in June, up 63.4% year-on-year, intensifying global competition.
Domestically, Xinjiang cotton is in the flowering and boll-setting stage with normal progress overall. Southern Xinjiang regions like Aksu and Kashgar report rapid plant development and stable boll retention, while northern Xinjiang is slightly behind but recovering with rising temperatures. Recent heatwaves above 40°C in parts of Xinjiang may increase boll shedding risks, requiring enhanced water and field management. National commercial cotton inventory stands at 3.1006 million tons, up 9.57% year-on-year, indicating still-high stock levels.
Textile Mills Cautious in Off-Season, Demand Recovers Moderately
The downstream textile sector remains in the traditional off-season, with mills cautious in raw material procurement and focused on destocking. Domestic C32S carded yarn averaged 23,298 yuan/ton, up just 34 yuan/ton or 0.1%. Imported C32S yarn averaged 22,821 yuan/ton, down 40 yuan/ton, now 477 yuan/ton cheaper than domestic yarn, suggesting improved competitiveness. Polyester staple fiber rose 45 yuan/ton to 7,232 yuan/ton.
Macroeconomic conditions remain stable. June CPI rose 1.0% year-on-year, while PPI rose 4.1%. Apparel CPI increased 1.4%, but apparel PPI fell 1.0%, below the overall industrial PPI average, reflecting upstream cost pass-through difficulties and price pressure on textile and garment manufacturers. The central bank's Q2 monetary policy committee meeting reiterated a moderately accommodative stance, focusing on boosting domestic demand, providing some market confidence.
Mixed Factors Point to Continued Volatility
In summary, the cotton market faces a mix of bullish and bearish factors. Bullish: commercial inventory drawdown, declining U.S. crop conditions, El Niño risks in India, and accommodative domestic policy. Bearish: reserve release expectations, weak off-season demand, front-loaded U.S. demand, and a wide domestic-international price spread. Short-term prices are likely to remain range-bound, with markets awaiting clearer directional signals.