In the third week of July, China's central reserve cotton auctions commenced with full clearance and notable premiums, yet domestic cotton prices only fluctuated narrowly. Meanwhile, ICE cotton futures rebounded above 80 cents per pound, driven by improved US export data and escalating Middle East tensions. The domestic-international price gap widened further, directly influencing textile mills' procurement strategies.
Auction Week One: Strong Demand Amid Supply Concerns
From July 20 to 24, 40,100 tons of reserve cotton were auctioned, with a 100% daily clearance rate and an average price of 17,404 RMB/ton. This price was 206 RMB/ton below the national cotton price B index (17,610 RMB/ton), yet the auction premiums were notably high. This indicates the market's strong acceptance of reserve cotton quality and pricing, effectively supplementing spot supply and easing mills' concerns about pre-new-crop tightness.
Regional surveys show that spinning mills in Zhejiang maintain high operating rates, with export orders and profitability significantly outperforming domestic orders. As the traditional peak season approaches, restocking demand is gradually rising. The reserve auctions are timely, meeting short-term cotton needs while providing price support.
Widening Price Gap: Import Cost Advantage
The domestic-international cotton price gap expanded by 95 RMB/ton week-on-week to approximately 2,992 RMB/ton (at 1% tariff). The international cotton index M averaged 88.45 cents/lb, translating to an import cost of 14,618 RMB/ton, nearly 3,000 RMB/ton below domestic spot prices. This spread offers significant cost advantages for mills with import quotas.
Notably, the current reserve auctions primarily involve imported cotton, partially balancing mill demand for imports. However, global cotton demand remains robust. US cotton export commitments for the 2025/26 season rose 49% week-on-week in the week ending July 16, while Brazil's daily exports in the first three weeks of July surged 32% year-on-year.
Macro Headwinds: Tariffs and Shipping Risks
On July 23, the USTR announced 10%-12.5% tariffs on 60 countries under Section 301, with China facing a 12.5% rate. This will directly raise export costs for Chinese textiles to the US, potentially diverting orders to Southeast Asia. Simultaneously, the EU fined AliExpress €550 million under the Digital Services Act, tightening regulations on cross-border e-commerce small parcel shipments, which could suppress apparel exports.
Middle East tensions persist, with oil tanker traffic through the Strait of Hormuz falling from 8 to 2 vessels daily, reducing crude shipments by 12 million barrels. This keeps international oil prices and shipping costs elevated, straining global supply chains.
Weather Watch: Xinjiang Heat Threatens Cotton Bolls
While cotton growth in major producing regions is generally normal, persistent high temperatures and low rainfall in Xinjiang are increasing irrigation pressure. Southern Xinjiang has adequate accumulated temperature for boll formation, but heat stress raises the risk of boll shedding. Growth in Hebei and Shandong is comparable year-on-year, while Hunan sees stable acreage and Hubei faces reductions.
Weather will be a key focus in the coming month. If prolonged heat leads to crop damage expectations, it could support higher cotton prices. For now, reserve auctions provide ample supply, and prices are expected to remain rangebound.