The first week of China's central reserve cotton auctions achieved a 100% transaction rate with notable premiums, yet domestic cotton prices remained stable. This apparent contradiction reveals a deeper market logic: while short-term supply is adequate, the market is pricing in concerns about future supply tightness through auction premiums.
Widening Price Gap Favors Imports
From July 20 to 24, 40,100 tons of reserve cotton were sold at an average price of 17,404 yuan per ton, significantly above the Zhengzhou Cotton Futures main contract settlement average of 15,980 yuan per ton. The high premiums reflect mills' worries about supply gaps before the new crop arrives. However, spot prices remained subdued, with the China Cotton Price Index B averaging 17,610 yuan per ton, down 49 yuan week-on-week, indicating that reserve releases are effectively capping spot prices.
Internationally, the price gap between domestic and imported cotton widened. The ICE cotton main contract averaged 80.59 cents per pound, while the International Cotton Index (M) averaged 88.45 cents per pound, translating to an import cost of just 14,618 yuan per ton—nearly 3,000 yuan below the domestic B index. This cost advantage makes imported cotton increasingly attractive for Chinese mills.
Recovering External Demand Amid Trade Barriers
Global cotton demand is improving. USDA data shows US cotton net export sales surged 49% week-on-week for the week ending July 16. Brazil's daily cotton exports in the first three weeks of July jumped 32% compared to the full-month daily average of July last year. This synchronized strength from two major exporters signals recovering demand across the global textile chain.
Yet trade uncertainties are mounting. On July 23, the US announced 10-12.5% tariffs on 60 countries under Section 301, including 12.5% on China. The EU fined AliExpress €550 million under the Digital Services Act, raising compliance costs for cross-border e-commerce. For Chinese cotton textile exporters, this creates a mixed picture of opportunity and headwinds.
Weather vs. Restocking: A Tug-of-War
On the supply side, Xinjiang's cotton regions face heat stress, with southern areas experiencing persistent high temperatures and dry conditions that raise the risk of boll shedding. Hubei's planting area is shrinking, while Hunan, Hebei, and Shandong report stable growth. Overall, new crop output expectations remain uncertain, with weather over the next month being the key variable.
On the demand side, despite the traditional summer lull, spinning mills in Zhejiang maintain high operating rates, with export orders and profitability significantly outperforming domestic sales. As the 'golden September and silver October' peak season approaches, restocking intentions are strengthening. Reserve cotton releases are filling the supply gap before the new crop, capping price upside for now, but the high auction premiums suggest that any supply disruption could trigger sharp price moves.
Near-Term Stability, Medium-Term Risks
In summary, reserve cotton auctions provide a price anchor, while the widening domestic-international price gap encourages import substitution. Over the next month, domestic cotton prices are expected to trade in a narrow range of 15,800-16,200 yuan per ton (Zhengzhou futures).
Medium-term risks center on three factors: potential yield losses from Xinjiang's heatwave, the actual impact of US tariffs on textile export orders, and Middle East tensions affecting shipping costs and import arrival schedules. Textile companies should leverage the current price gap to optimize inventory mix and monitor weather developments for tactical trading opportunities.