Domestic cotton prices experienced a sharp rally followed by a pullback this week, driven by inventory drawdowns and policy expectations. The Zhengzhou Cotton Futures main contract averaged 16,205 yuan/ton, up 0.7% week-on-week, hitting the highest intraday level since April before retreating. Meanwhile, international cotton prices surged above the 80-cent mark, with the NYCE main contract averaging 80.49 cents/lb, up 4.5% for the week, fueled by escalating geopolitical tensions and a decline in US cotton quality ratings. The resulting domestic-import price gap expanded to approximately 3,200 yuan/ton, making imported cotton significantly cheaper and reshaping downstream procurement strategies.
Inventory Drawdown and Reserve Release Expectations: A Ceiling on Domestic Prices
Current commercial cotton inventories stand at 3.1006 million tons, up 9.57% year-on-year, but market attention has shifted from total supply to the pace of structural drawdown. Xinjiang cotton regions have entered the boll-setting stage, with faster growth in southern areas like Aksu and Kashgar, but slower progress in northern Xinjiang. Recent high temperatures exceeding 40°C in some areas have increased the risk of boll shedding, amplifying expectations of a supply gap before the new crop arrives. Meanwhile, recurring rumors of state reserve releases have triggered profit-taking by speculative longs.
Downstream, the textile market remains in a traditional off-season, with mills buying cautiously and focusing on destocking. Domestic C32S combed yarn averaged 23,298 yuan/ton, up only 34 yuan/ton, while imported yarn prices fell, creating an inverted spread of 477 yuan/ton. This stagnation at the yarn level indicates that upstream raw material cost increases are not being passed through, squeezing mill margins.
Geopolitical Risks and Tariff Uncertainty: The International Premium
The deterioration of US-Iran relations was the key driver for international cotton strength this week. The reinstatement of US sanctions on Iranian oil pushed up global oil prices, fueling inflation concerns. Simultaneously, the US Trade Representative's Office held hearings on new tariffs targeting over 60 economies, and the 10% universal tariff under Section 122 of the Trade Act of 1974 faces a potential adjustment in late July. Reuters data showed US container imports rose 8.2% in June, with Chinese imports surging 27.4%, reflecting accelerated front-loading by US companies to avoid future tariff hikes.
This 'rush to export' phenomenon provides short-term support for Chinese textile orders but also pulls forward future demand. On the supply side, USDA data showed US cotton quality ratings fell to 46%, down 2 points from both the prior week and last year, with persistent heat and drought in Texas stressing dryland cotton. The intensifying El Niño in the Pacific may disrupt the Indian monsoon, threatening Indian yields. Brazil exported 217,000 tons of cotton in June, up 63.4% year-on-year, intensifying global supply competition.
Macro Environment and Industry Transmission: Structural Pressures Amid a Moderate Recovery
China's macroeconomy continues its steady improvement. The central bank's Q2 monetary policy committee meeting on July 8 reiterated a moderately accommodative stance with enhanced counter-cyclical adjustments. June CPI rose 1.0% year-on-year, with clothing CPI up 1.4%, indicating modest recovery in consumer demand. However, clothing PPI fell 1.0%, lagging the overall industrial PPI rise of 4.1%, highlighting the textile industry's struggle with cost pass-through and fierce market competition.
This means that even with short-term raw material price increases, mills cannot fully pass on costs, especially given tariff uncertainties in export markets. Although polyester staple fiber prices rose slightly to 7,232 yuan/ton, its substitution effect may strengthen due to high cotton prices, further capping cotton's upside.