Reserve Cotton Release Sees Premium Bidding in First Week, Widening Domestic-International Price Gap Signals Market Shift

The first week of China's central reserve cotton release concluded with a 100% transaction rate on the 40,100 tonnes offered, with bidding premiums signaling genuine restocking urgency among textile mills ahead of the new crop season. The average transaction price reached 17,404 yuan/ton, notably above spot market levels.

Reserve Release Eases Supply Anxiety, But Price Floor Holds

Since July 20, the reserve release has effectively supplemented market supply, particularly of high-grade imported cotton. Domestic cotton prices remained range-bound: Zhengzhou Cotton Futures main contract averaged 15,980 yuan/ton, down only 0.5% week-on-week, while the China Cotton Index (B) stood at 17,610 yuan/ton, down 0.3%. The premium paid for reserve cotton—above futures prices—indicates that mills are pricing in tighter supply ahead of the peak season, despite the policy intervention.

International Cotton Rebounds Above 80 Cents

ICE cotton futures averaged 80.59 cents/lb, up 0.3% from the prior week. Key drivers included a 49% surge in US upland cotton net export sales to 11,600 tonnes for the week ending July 16, and strong Brazilian shipments—daily exports in the first three weeks of July averaged 7,322 tonnes, up 32% from July 2024 levels. Additionally, heightened Middle East tensions reduced very large crude carrier transits through the Strait of Hormuz from 8 to 2 per day, pushing oil prices and shipping costs higher.

The domestic-international cotton price spread widened to 95 yuan/ton, with imported cotton costing 14,618 yuan/ton (1% tariff basis), nearly 3,000 yuan below domestic grades. For mills with import quotas, this remains a significant arbitrage opportunity, though reserve releases are absorbing some of that premium.

Yarn and Polyester: Stable Domestic, Firming Imports

Domestic C32S combed cotton yarn held at 23,318 yuan/ton, while imported C32S edged up 0.3% to 22,970 yuan/ton, narrowing the gap. Polyester staple fiber rose 129 yuan/ton to 7,584 yuan/ton, tracking crude oil gains. June textile and apparel exports reached $29.27 billion, a year-to-date high, and 23 of 41 listed textile firms reported positive H1 profit forecasts, 12 with over 100% growth. However, the recovery remains export-led, with domestic-oriented SMEs still facing margin pressure.

Weather and Policy Risks

Xinjiang's cotton areas enjoy favorable heat and light, but persistent high temperatures in southern Xinjiang raise the risk of boll shedding. Hubei may see reduced planted area. On the policy front, the US imposed a 12.5% tariff on Chinese goods under Section 301, while the EU fined AliExpress €550 million under the Digital Services Act, raising compliance costs for cross-border e-commerce small parcels—a key channel for Chinese apparel exports.

Practical Recommendations

For Purchasers - Prioritize import quota utilization to lock in lower-priced foreign cotton, especially high-grade US and Brazilian bales. - Monitor reserve auction premiums; increase bidding if premiums remain below 5% of spot prices. - Delay Xinjiang cotton purchases until late August when weather impact on yields becomes clearer.

For Exporters - Diversify destination markets toward Southeast Asia, the Middle East, and Africa to mitigate US-EU tariff and regulatory headwinds. - Shift from cross-border e-commerce small parcels to general trade or overseas warehousing to reduce per-unit logistics and compliance costs. - Secure ocean freight contracts early to hedge against potential rate spikes from Middle East shipping disruptions.