Domestic cotton futures staged a brief rally to a four-month high this week but failed to hold gains, settling at an average of 16,205 CNY per ton for the main contract. In contrast, international cotton prices surged past the 80-cent mark, driven by geopolitical tensions, deteriorating U.S. crop conditions, and tariff uncertainty. The divergence highlights the competing forces of inventory destocking at home and external risk premiums abroad.
Domestic: Inventory support meets seasonal headwinds
The Zhengzhou Cotton Futures main contract averaged 16,205 CNY/ton, up 0.7% week-on-week. On the spot side, the China National Cotton Price B Index averaged 17,739 CNY/ton, up 96 CNY. The primary driver was continued commercial inventory drawdown—data from the National Cotton Trade Market shows current commercial stocks at 3.1006 million tons, up 9.57% year-on-year.
However, the rally quickly faded as mills remain cautious amid the traditional off-season. China's National Bureau of Statistics reported that June apparel CPI rose 1.4% year-on-year, but apparel PPI fell 1.0%, lagging the overall industrial PPI average of +4.1%. This indicates weak cost pass-through and persistent margin pressure on textile firms, limiting their willingness to restock raw materials.
Offshore: Geopolitics and tariff fears fuel rally
International cotton prices were lifted by three forces. First, escalating U.S.-Iran tensions pushed oil prices higher, stoking commodity inflation expectations. NY Cotton Futures averaged 80.49 US cents per pound, up 4.5% week-on-week.
Second, supply concerns mounted. The USDA reported U.S. cotton good-to-excellent ratings fell to 46%, down 2 percentage points from the prior week and 2 points below last year. Texas is experiencing persistent heat and drought, while the strengthening El Niño threatens India's monsoon rains.
Third, tariff uncertainty triggered front-loading by U.S. importers. Reuters data shows June U.S. container imports rose 8.2% year-on-year, with Chinese shipments surging 27.4%. The U.S. Trade Representative held hearings July 7-10 on potential new tariffs against 60+ economies, with a 10% universal tariff adjustment window opening in late July.
Outlook: Borrowed demand meets cautious buying
The U.S. pre-buying spree has pulled forward some demand, raising the risk of a slowdown once tariffs are implemented. Domestically, Xinjiang cotton areas are progressing normally, but temperatures above 40°C in some regions threaten boll shedding. The Yellow and Yangtze river basins face excessive rainfall, increasing pest and humidity risks.
China's macro environment remains stable—the PBOC pledged accommodative monetary policy in its Q2 meeting, while June CPI rose 1.0% and PPI rose 4.1%. Yet the textile industry's pricing power remains weak, keeping mill procurement cautious.