The domestic cotton textile market is in a rare 'stable inside, strong outside' pattern: reserve cotton sales have suppressed domestic futures, while active export orders keep the spot basis unusually firm. As of July 31, the average settlement price of the main Zhengzhou cotton futures contract fell 0.9% week-on-week, while the international cotton index (M) converted to RMB rose only 0.2%, narrowing the domestic-foreign price gap by 128 yuan/ton. This divergence means the cost advantage of domestic textile mills is shrinking, but profit support from exports is strengthening.
Background Heat and geopolitics became the two major variables this week. In Xinjiang, persistent drought has increased irrigation pressure on local cotton fields, and the National Meteorological Bureau warns of a possible super El Nino, the strongest in 150 years, raising risks of high temperatures, drought, and heavy rainfall. Meanwhile, the US-Iran conflict has escalated, with attacks expanding to Saudi Arabia, Jordan, and other countries, disrupting Red Sea shipping and pushing Brent crude above $91/barrel, indirectly supporting international cotton prices and raising chemical fiber costs.
On the macro front, China's July manufacturing PMI fell to 49.2%, with consumer goods manufacturing PMI even lower at 47.8%, indicating weak domestic demand. The Politburo meeting emphasized counter-cyclical adjustments, leading to expectations of economic repair in H2, but short-term cotton consumption remains subdued. More notably, on July 31, the US Department of Homeland Security added 43 Chinese companies to the UFLPA entity list, including well-known cotton textile firms like Septwolves, Weiqiao, and Tongzhou Cotton, escalating compliance risks for exports to the US.
Industry Impact The international cotton market shows a pattern of tight supply and recovering demand. Brazil exported 128,000 tons of cotton in the first four weeks of July, with average daily exports up 28% year-on-year; US cotton new-crop sales jumped to 79,900 tons, indicating active trading. However, Northern Hemisphere growth is mixed: US cotton good-to-excellent ratings fell to 46%, down 9 percentage points year-on-year; India's planting progress lags by 4%, and due to competition from sugarcane, actual planted area may fall below 13 million hectares. These factors suggest international cotton prices will remain relatively strong.
Domestically, reserve cotton sales have alleviated mills' demand, but Xinjiang drought and high temperatures elsewhere raise concerns about potential yield losses, making the market cautious about future supply. Downstream mills maintain high operating rates, but inventory accumulation is increasing among spinners in Nantong and Foshan, with fierce domestic competition and thin margins, while export orders and profitability are significantly better than domestic. This divergence leads to tight supply of high-grade domestic and imported cotton, keeping spot basis firm.
Cotton yarn prices are stable domestically and rising abroad: domestic C32S combed yarn prices were basically flat, while imported yarn prices rose 0.5%, narrowing the price gap to 233 yuan/ton, weakening the price advantage of imported yarn. Polyester staple fiber prices fell 77 yuan/ton to 7,507 yuan/ton, enhancing substitution effects and putting pressure on cotton prices. Additionally, stricter tax audits on e-commerce, live-streaming, and cross-border businesses add compliance pressure on mills' online sales channels, potentially affecting shipment pace.