While cotton fields in Xinjiang are under drought stress from persistent heat, international oil prices have surged again due to escalating conflict in the Middle East. This week's cotton market presents a rare pattern of "stable domestic, firm international": domestic futures and spot prices slipped slightly, while ICE cotton traded higher on crude oil premium and rebounding US exports. Behind this divergence lies a complex interplay of supply-side weather risks and demand-side geopolitical disruptions.
Supply Side: Heat and Planting Delays Ring Alarm Bells
Major cotton-producing regions in the Northern Hemisphere are experiencing contrasting conditions. Persistent drought in Xinjiang has increased irrigation pressure on local fields, with the National Meteorological Service warning of a potential super El Niño event that could amplify heat and drought risks. Meanwhile, US cotton crop conditions deteriorated, with good-to-excellent ratings falling 9 percentage points year-on-year to 46%, despite slightly faster squaring and boll-setting progress. In India, planting area lagged 4% year-on-year as of July 24, and competition from sugarcane in southern and central regions may push actual acreage below the forecast of 13 million hectares.
Supply concerns are not isolated. Brazil exported 128,000 tons of cotton in the first four weeks of July, with daily average exports up 28% year-on-year, indicating a reallocation of global trade flows. US new-crop sales jumped to 79,900 tons for the week ending July 23, reflecting active market participation. This suggests that despite generally stable crop progress, expectations of structural shortages are forming, particularly for high-grade cotton where supply elasticity is visibly narrowing.
Demand Side: Strong Exports vs. Weak Domestic Consumption
Demand presents a clear picture of "hot outside, cold inside." Mills in Nantong (Jiangsu) and Foshan (Guangdong) reported rising finished goods inventories, with intense domestic competition squeezing margins. However, export orders and profitability significantly outperformed domestic sales, supporting demand for imported and high-grade domestic cotton, and keeping spot basis firm.
This divergence is reflected in yarn prices: domestic C32S combed yarn prices were roughly flat, while imported yarn prices rose 0.5%, narrowing the spread to 233 yuan/ton. Polyester staple fiber prices fell 77 yuan/ton to 7,507 yuan/ton, easing substitution pressure. Notably, increased tax inspections on e-commerce, live-streaming, and cross-border businesses are adding compliance pressure on mills' online sales channels, potentially further squeezing domestic profit margins.
Macro and Policy: Geopolitical Conflict Reshapes Trade Landscape
On the macro front, the US-Iran conflict has expanded to Saudi Arabia, Jordan, and other countries, keeping Red Sea shipping risky and the Strait of Hormuz not fully operational. Shipping costs and war-risk insurance premiums remain elevated, with Brent crude briefly exceeding $91 per barrel. Rising oil prices fuel inflation concerns, increasing market expectations of Fed rate hikes. On July 31, the US added 43 Chinese companies to the UFLPA Entity List, including well-known cotton textile firms like Septwolves, Weiqiao, and Tongsheng Cotton, meaning narrower access to US markets and forcing companies to reassess compliance risks.
Domestically, the Politburo meeting emphasized stronger counter-cyclical adjustments and expanding domestic demand. July manufacturing PMI fell to 49.2%, with consumer goods PMI at 47.8%, highlighting weak end-demand. Reserve cotton sales, totaling over 80,000 tons cumulatively, have injected stability into the market, easing mills' concerns but also capping upside for domestic prices.
Price Outlook: Firm Basis Likely to Persist; Spread Narrows
In summary, international cotton prices are expected to remain firm on geopolitical premiums and export demand, while domestic prices are likely to stay stable due to reserve sales and weak demand. The domestic-import spread narrowed by 128 yuan/ton this week, with imported cotton cost at 14,648 yuan/ton, about 2,863 yuan lower than the domestic B index. This narrowing trend may attract more import purchases.
For textile companies, the urgency to secure high-grade cotton sources is rising. If Xinjiang heat persists, new-crop output and quality may suffer, potentially strengthening spot basis further. Companies should monitor El Niño developments and US crop condition changes to adjust procurement strategies flexibly.