Domestic cotton prices experienced a sharp rally followed by a significant retreat this week, while international prices continued to strengthen due to geopolitical tensions and weather concerns. The widening spread between domestic and international prices has made imported cotton more cost-advantageous, directly influencing procurement strategies for Chinese textile mills.
Domestic Inventory Drawdown Meets Policy Uncertainty
Zhengzhou cotton futures averaged 16,205 yuan/ton this week, up 106 yuan/ton from the previous week, but briefly hit the highest level since April before quickly pulling back. On the spot market, the National Cotton Price B Index averaged 17,739 yuan/ton, up 0.5%. The price surge was driven by ongoing commercial inventory drawdown and market speculation about potential state reserve releases. Data from the National Cotton Trading Market shows current commercial inventories at 3.1006 million tons, up 9.57% year-on-year. While total inventory remains ample, the accelerated drawdown has sparked concerns about tightening supply.
Downstream feedback indicates the textile market remains in the traditional off-season, with mills maintaining cautious purchasing and focusing on destocking. Domestic C32S combed yarn averaged 23,298 yuan/ton, up only 0.1%, while imported yarn prices fell 0.2%, creating a negative spread of 477 yuan/ton. This suggests domestic spinners face increasing import substitution pressure, particularly in mid-to-low count yarn segments.
Geopolitical Risks and Tariff Uncertainty Lift International Prices
International cotton prices strengthened notably this week, with ICE December futures averaging 80.49 cents/lb, up 3.44 cents/lb or 4.5%. Two factors drove this: first, escalating US-Iran tensions pushed oil prices higher, fueling inflation expectations; second, uncertainty around US tariff policy increased. The US Trade Representative held hearings on July 7-10 regarding new tariffs on 60-plus economies, while the 10% universal tariff under Section 122 of the Trade Act of 1974 faces an adjustment window in late July.
In response, US companies accelerated pre-stocking. Reuters data shows June US container imports rose 8.2% year-on-year, with Chinese imports surging 27.4%. This front-running has temporarily supported international prices but also means some future demand has been borrowed. For Chinese textile exporters, this signals potential order weakness in Q3 and beyond.
Weather Variables: US Quality Drops, India Faces El Niño
USDA data shows US cotton quality ratings at 46% good/excellent as of July 5, down 2 percentage points from the prior week and 2 points year-on-year. Texas continues to experience hot, dry weather, stressing dryland cotton, while the Southeast enjoys better rainfall. The crop is entering squaring and early boll-setting, slightly ahead of normal, but weather during this critical period remains uncertain.
In India, the US Climate Prediction Center notes the ongoing El Niño is strengthening, potentially disrupting the monsoon and reducing cotton yields. Brazil, meanwhile, exported 217,000 tons of cotton in June, up 63.4% year-on-year, becoming a major incremental supply source.
Xinjiang Crop Normal, But Heat and Off-Season Curb Demand
Xinjiang cotton regions are generally normal, with southern areas like Aksu and Kashgar showing rapid plant development and stable boll-setting. Northern Xinjiang is slightly behind but recovering as temperatures rise. Recent heatwaves above 40°C in parts of Xinjiang increase the risk of boll shedding. The Yellow River and Yangtze River regions are entering boll-setting, with excessive rainfall in some areas requiring pest and moisture management.
On the macro front, June CPI rose 1.0% year-on-year, with apparel CPI up 1.4%, indicating modest consumer recovery. However, apparel PPI fell 1.0%, below the industrial average, reflecting ongoing factory-gate price pressure. The PBOC's Q2 monetary policy committee meeting reiterated moderately accommodative policy to boost domestic demand, but transmission to textile end-demand will take time.