Foreign Cotton Price Surge Triggers Cost Pass-Through in China's Cotton Textile Chain

Foreign cotton prices experienced a notable jump in mid-July, with the International Cotton Price Index (SM) rising 0.89 cents per pound to 91.81 cents per pound. Converted at the 1% tariff rate, the delivered price at China's main ports has reached 15,374 yuan per tonne. While the absolute increase is modest, its signal value for China's cotton textile chain—now transitioning between low and peak seasons—far outweighs the numbers: the floor for raw material costs is being reset.

Cost Pass-Through: The Linkage from Overseas to Domestic Markets

The foreign cotton price rise first impacts the procurement cost of imported cotton. Chinese textile mills import approximately 2 million tonnes of cotton annually, primarily from the US, Brazil, and India. When overseas quotes rise, the RMB-denominated port delivery price directly increases, providing a floor for domestic spot cotton prices. On July 13, the Zhengzhou Cotton Futures main contract (2609) closed at 16,080 yuan per tonne, up 70 yuan per tonne, tracking the foreign market's strength. This indicates that China's domestic market remains highly sensitive to external price movements, and the domestic-foreign price spread is narrowing.

For cotton yarn producers, raw cotton accounts for 60%-70% of their production costs. The cost increase from foreign cotton is transmitting downstream along the value chain. However, the transmission weakens—cotton yarn spot prices typically lag behind those of raw cotton, constrained by the bargaining power of downstream grey fabric and garment orders. Currently, the cotton yarn segment scores only 0.5 (on a scale of -1 to 1), compared to raw cotton's 1.0, suggesting the market still doubts downstream absorption capacity.

Industry Impact: Procurement Pace and Inventory Strategies Under Adjustment

The strengthening of foreign cotton prices is altering procurement behavior among textile mills. Over the past few months, domestic cotton prices were relatively stable, leading some mills to adopt a just-in-time, low-inventory strategy. But with the sudden overseas rally, the cost advantage of imported cotton has diminished significantly. For SM-grade cotton, the RMB delivery price of 15,374 yuan per tonne is now only 200-300 yuan per tonne below domestic equivalents, essentially erasing the price edge of imports.

This means enterprises that once relied on imported cotton to cut costs now need to reassess their sourcing. Some may shift to domestic Xinjiang cotton or state reserve releases, but this brings challenges in quality consistency and supply availability. Meanwhile, the rise in Zhengzhou futures prices has locked in some hedging positions, further reducing marketable spot volumes.

Feedback from downstream players shows increased caution among cotton yarn traders and fabric mills. Grey fabric order quotes have not yet been broadly adjusted, but some yarn mills have started tentatively raising ex-factory prices. If foreign cotton prices stay elevated, a wave of concentrated restocking could emerge during the traditional peak season in August-September, fully releasing cost pressure downstream.

Practical Recommendations

For Procurement Managers - Closely monitor foreign cotton price trends and the domestic-foreign spread. The cost advantage of imports is now limited; consider increasing domestic cotton procurement to reduce exchange rate risk. - Use Zhengzhou Cotton Futures for forward price locking. Around 16,000 yuan per tonne, consider building virtual inventory in batches to lock in raw material costs for the next 2-3 months. - When signing long-term contracts with yarn mills, include cost pass-through clauses to partially shift the risk of raw material price volatility upstream, avoiding bearing the full brunt of price increases alone.

For Foreign Trade Enterprises - Export order pricing cycles typically span 30-60 days. The current foreign cotton rise has not yet fully transmitted to yarn and fabric stages. Negotiate price adjustment mechanisms with clients promptly to prevent profit erosion from raw material hikes. - Monitor the combined effect of RMB exchange rates and cotton import costs. If the RMB depreciates, the RMB cost of imported cotton will rise further—prepare foreign exchange hedging in advance. - For orders already taken but not yet produced, assess the feasibility of substituting imported cotton with domestic alternatives to compress raw material costs while maintaining quality.