Domestic cotton prices experienced a brief surge this week before retreating under pressure. While the continued drawdown of commercial inventories provided some support, persistent rumors of state reserve releases and cautious downstream procurement drove the Zhengzhou Cotton futures main contract to quickly pull back after hitting its highest level since April, settling at a weekly average of 16,205 yuan per ton, a modest increase of just 0.7% from the previous week. This data highlights a key contradiction: destocking at the upstream level is accelerating, but the recovery in end-consumer demand is not strong enough to support sustained price increases.
International Cotton: Dual Drivers of Geopolitics and Policy Uncertainty
In stark contrast to the domestic market's choppy performance, international cotton prices staged a strong rally this week. The New York futures main contract averaged 80.49 US cents per pound for the week, a substantial 4.5% increase week-on-week, firmly re-establishing the 80-cent mark. The core drivers of this rally are not traditional supply-demand fundamentals, but rather external shocks from two dimensions:
- Geopolitical risk directly pushes up energy costs. The US-Iran situation deteriorated further in early July, with both sides striking each other's targets. The US reinstated oil sanctions on Iran, driving up international crude oil prices. As a key cost component for man-made fibers and cotton transport, rising oil prices have elevated the entire textile chain's raw material cost expectations.
- Uncertainty over US tariff policy is triggering a wave of pre-stocking. From July 7-10, the US Trade Representative held hearings on proposed new tariffs against 60+ economies. Combined with an upcoming adjustment window for the 10% universal tariff under Section 122 of the Trade Act of 1974, US companies are accelerating imports from major suppliers like China to hedge against potential cost increases. Reuters data shows US container imports rose 8.2% year-on-year in June, with imports from China surging 27.4%. This pre-buying, while borrowing from future demand, is providing significant short-term support to international cotton prices.
Domestic Chain: Blocked Cost Pass-Through and End-Market Pressure
China's textile chain is caught in a pincer movement between firm upstream costs and weak downstream demand. Price data shows domestic cotton yarn prices inched up, but the increase was far smaller than that of raw cotton. The weekly average price for C32S carded yarn was 23,298 yuan per ton, up a mere 0.1% from the previous week. Imported cotton yarn prices actually fell, now trading 477 yuan per ton below domestic yarn. This indicates that spinning mills are struggling to pass on higher costs.
Data from the National Bureau of Statistics reveals a deeper issue: while the apparel consumer price index (CPI) rose 1.4% year-on-year in June, the apparel producer price index (PPI) fell 1.0%, significantly underperforming the overall industrial PPI increase of 4.1%. This divergence clearly shows that brands and retailers, facing intense price competition, are squeezing their upstream suppliers to maintain margins. For textile mills, any increase in raw material costs directly erodes already thin profits.
Supply Side: Global Weather Disruptions and Regional Divergence
Uncertainty on the supply side is building. USDA data shows the US cotton crop rating as 'good-to-excellent' fell to 46% as of July 5, down 2 percentage points from the prior week, with persistent heat and dryness in Texas stressing dryland cotton. Simultaneously, the strengthening El Niño pattern threatens to weaken the Indian monsoon, potentially impacting yields there. Brazil exported a record 217,000 tons of cotton in June, up 63.4% year-on-year, partially filling supply gaps elsewhere, but the perception of tighter global supply is gaining traction.
Domestically, the Xinjiang cotton region is developing normally overall, but recent heatwaves with temperatures exceeding 40°C in some areas increase the risk of boll shedding. National commercial cotton inventory stands at 3.1006 million tons, down year-on-year but still at a relatively high level for this time of year, which buffers some supply-side anxiety.
Outlook: Volatile Range-Bound, Focus on Policy and Weather
In summary, the tug-of-war between bullish and bearish factors is unlikely to resolve soon. Internationally, geopolitical risks and tariff policies are the main sentiment drivers, but the pre-stocking by US companies has borrowed from future demand; once policies are clarified, the market could face a correction. Domestically, while macro policy signals support for growth, the textile market is in its traditional off-season, with mills purchasing only for immediate needs and prioritizing destocking. Both domestic and international cotton prices are expected to remain volatile and range-bound next week. Investors should closely monitor the evolution of US-Iran tensions, the US tariff adjustment window, and weather conditions in major Northern Hemisphere growing regions.