While central reserve cotton releases steady the domestic market, escalating US-Iran conflict and firm export data push international prices higher. As of July 31, Zhengzhou cotton futures averaged 15,833 yuan/ton, down 0.9% week-on-week; the China Cotton Index B averaged 17,511 yuan/ton, down 0.6%. Meanwhile, ICE cotton averaged 80.68 US cents/lb, up 0.1%. The domestic-international price gap narrowed by 128 yuan/ton, or 4.3%. This narrowing signals improved competitiveness of imported cotton and highlights the scarcity of high-grade domestic supply.
Heat and Geopolitics: Dual Supply-Side Variables
Northern Hemisphere cotton growth remains generally stable, but regional differences are widening. US cotton squaring and boll-setting rates are up 2 and 3 percentage points year-on-year, yet good-to-excellent condition fell to 46%, down 9 points. India's sowing lags 4%, at 9.87 million hectares by July 24, with actual area likely below 13 million due to cane competition. In Xinjiang, persistent drought raises irrigation pressure; the national meteorological agency warns of a possible record El Niño. This increases uncertainty for yield and quality, making early procurement of high-grade cotton more critical.
Geopolitically, the US-Iran conflict has expanded to Saudi Arabia, Jordan, and others, keeping Red Sea shipping risky and Hormuz transit inefficient. Brent crude briefly exceeded $91/barrel. Higher oil lifts chemical fiber costs, indirectly supporting cotton prices. Brazil exported 128,000 tons in the first four weeks of July, up 28% in daily average; US cotton commitments jumped to 79,900 tons. These factors suggest international prices will remain firm in the near term.
Diverging Domestic and Export Demand: Micro-Foundation of Firm Basis
Domestic downstream shows a clear 'external hot, internal cold' pattern. Spinning mills in Xinjiang and Jiangsu-Zhejiang maintain high operating rates, but finished goods inventories are rising in Nantong and Foshan. Export orders and profitability significantly outperform domestic sales, where price competition is fierce and margins thin. Strong export demand supports imported and high-grade domestic cotton, keeping spot basis firm. For mills, this means shifting product mix toward exports while accepting squeezed domestic margins.
Policymakers are stepping up counter-cyclical adjustments, but July PMI fell to 49.2%, with consumer goods PMI at 47.8%. On July 31, the US added 43 Chinese companies to the UFLPA entity list, including major cotton textile firms. This signals stricter compliance scrutiny for US-bound exports, making supply chain traceability a hard requirement.
Price Outlook and Operational Strategies
Given tight global supply-demand, active exports, and oil price support, international cotton prices are expected to stay firm. Domestic prices will likely remain stable due to reserve releases and high operating rates. The narrowing price gap may continue, enhancing imported cotton's cost-effectiveness, but watch for freight and insurance volatility from geopolitical risks.