Reserve Cotton Auctions Kick Off with Premiums, Widening Domestic-International Spread Signals Supply-Demand Tug-of-War

The third week of July 2026 marked a pivotal moment for China's cotton market as the central reserve cotton sales officially commenced. The first week saw 40,100 tonnes offered, all cleared at a 100% transaction rate with notable premiums, signaling mills' proactive inventory building ahead of the peak season. Meanwhile, international cotton prices rebounded above 80 cents/lb, widening the spread between domestic and foreign markets and highlighting divergent pricing logics.

First-Week Auction Data: High Clearance and Premiums Reflect Mill Sentiment The reserve sales, starting July 20, achieved a daily clearance rate of 100%, with an average transaction price of RMB 17,404/tonne. This was about RMB 206/tonne below the National Cotton Price B Index (RMB 17,610/tonne), a modest discount given the superior quality of imported reserve cotton. More telling was the premium over the floor price, indicating that mills prioritized supply certainty over cost. Downstream, spinning mills in Zhejiang maintained high operating rates, with export orders significantly outperforming domestic ones. As the traditional 'Golden September and Silver October' season approaches, restocking appetite has strengthened. The reserve releases fill the supply gap before the new crop arrives (typically September-October), alleviating concerns over raw material shortages. However, 40,100 tonnes per week remains marginal against monthly consumption of 600,000-700,000 tonnes.

Widening Domestic-International Spread: Two Markets, Two Logics Domestically, the Zhengzhou Cotton Futures主力 contract averaged RMB 15,980/tonne, down 0.5% week-on-week with minimal volatility. In contrast, the ICE cotton futures主力 contract averaged 80.59 cents/lb, up 0.3%. A sharper divergence appeared in spot prices: the International Cotton Index (M) averaged 88.45 cents/lb, translating to an import cost of RMB 14,618/tonne (down 1.0% week-on-week), widening the domestic-international spread by RMB 95/tonne (3.3%). This 'stable domestic, strong external' pattern reflects two distinct price transmission chains. Domestically, reserve sales increased effective supply amid off-season demand, capping Zheng cotton upside. Internationally, ICE cotton gains were driven by three factors: improved US export data (net sales up 49% week-on-week for the week ending July 16), surging Brazilian exports (up 32% year-on-year in July), and geopolitical tensions lifting commodity prices. The widening spread discourages import purchases, but quota constraints and reserve supply limit mills' ability to exploit the cost advantage.

Macro Risks Materialize: Tariffs, Regulation, and Shipping Pressures On July 23, the USTR announced 10%-12.5% tariffs on 60 countries under Section 301, with China facing 12.5%. This directly pressures textile and apparel exports to the US. Concurrently, the EU fined AliExpress EUR 550 million under the Digital Services Act, raising compliance costs for cross-border e-commerce, especially small-package shipments of footwear and apparel. Shipping risks persist: Morgan Stanley reported a drop in very large crude carrier transits through the Strait of Hormuz from 8 to 2 per day since late June, slashing crude oil flows by 12 million barrels. While cotton shipments don't rely on that strait, higher fuel costs and rerouting risks around the Red Sea continue to inflate global supply chain costs. Short-term, tariff headwinds have been partially priced in, as evidenced by improved US cotton export data. Medium-term, escalating trade tensions could dampen China's textile export growth, while high shipping costs support import parity and indirectly boost the competitiveness of domestic reserve cotton.

Supply-Demand Balance: Weather, Restocking, and Policy Expectations Domestic cotton-growing regions report normal crop development, but high temperatures pose a risk. Persistent heat and low rainfall in southern Xinjiang increase irrigation pressure, raising concerns about boll shedding. Hubei and Hunan may see reduced planted area, while Hebei and Shandong are on par with last year. New crop output expectations remain uncertain, but the market sees limited upside potential. On the demand side, June textile and apparel exports hit USD 29.27 billion, up 14.3% month-on-month and 7.2% year-on-year, the highest since January 2025. Among 41 A-share textile and apparel firms, 23 expect net profit growth in H1 2026, with 12 forecasting over 100% growth. These figures suggest the industry's fundamentals remain solid, though profits are skewed toward export-oriented players. The reserve sales pace will be the key policy variable in the coming two months. If the weekly volume of 40,100 tonnes is maintained, monthly supply would reach about 160,000 tonnes, covering roughly 25% of national consumption. This is sufficient to cap price rallies but not to prevent mills from restocking ahead of the peak season. Zheng cotton is expected to trade in a range of RMB 15,500-16,500/tonne, with direction depending on new crop output estimates and trade negotiations.

For Buyers - Monitor reserve auction premiums: a decline signals a buying opportunity; a rise suggests waiting for increased supply or price pullbacks - Imported cotton offers a cost advantage but consider quota costs and lead times; use reserve cotton as a base and imports as flexible top-ups - Xinjiang's heat impact on output will become clearer by mid-August; adjust procurement plans accordingly

For Exporters - After the 12.5% US tariff, negotiate FOB terms with clients to share costs, or explore transit trade via Southeast Asia - EU e-commerce regulation raises small-package costs; consider overseas warehouses or general trade channels - Shipping risks persist; lock in forward freight contracts to avoid peak-season rate spikes