Cotton prices have been climbing with a volatile tone, yet downstream cotton yarn mills' raw material inventories remain unchanged. As of August 6, domestic pure cotton yarn mills held 30.11 days of inventory, flat week-on-week. This contrast highlights a typical feature of the textile supply chain: costs are rising, demand is lagging, and intermediate players prefer to keep low stocks rather than chase higher prices.
Raw Material Prices Rise, Cost Support Emerges
On August 6, the main Zheng cotton contract (2609) closed at 16,150 CNY/ton, up 185 CNY/ton from the previous day, with high trading volume and open interest, indicating a strong market sentiment. Spot cotton prices also rose steadily, providing a floor for cotton yarn prices. Meanwhile, the main Zheng yarn contract (2611) closed at 22,625 CNY/ton, up 145 CNY/ton, a smaller gain than cotton, reflecting the difficulty in passing through cost increases.
From a bullish/bearish scoring perspective, cotton scored 1 (slightly bullish) while cotton yarn scored 0.5 (neutral to slightly bullish), showing that the market is more confident in cotton's upside than yarn's. Cotton, as a raw material, is more directly affected by supply-side factors and capital flows, whereas yarn sits in the middle, squeezed by both upstream costs and downstream pressure from fabric mills and garment makers.
Inventory Strategy Diverges, Restocking Enthusiasm Weak
The flat inventory level is not accidental. Most mills adopt a just-in-time purchasing approach, with limited enthusiasm for restocking. This contrasts sharply with the same period in 2023, when mills proactively built up stocks due to fears of supply shortages. Now, with prices rising modestly and demand showing no clear improvement, mills prefer a low-inventory, fast-turnover model to mitigate risks.
This strategy has dual effects on the supply chain: it suppresses liquidity in the cotton spot market, making price increases less volume-supported; and it enhances mills' resilience to price drops, as they hold minimal stocks. For upstream ginners and traders, this means a longer sales window and a need for more patient pricing strategies.
Weak Demand Hinders Price Pass-Through
The core issue for cotton yarn is demand. Downstream weaving mills are operating at low utilization rates, with orders mostly short-term and small-lot. Terminal garment consumption is recovering slowly, and export orders are constrained by overseas inventory cycles. As a result, even though cotton prices are rising, yarn mills cannot fully pass on costs and must absorb part of the increase.
This pattern is unlikely to change in the short term. Unless there are sudden supply disruptions or policy changes, cotton prices will likely remain range-bound with an upward bias. Yarn prices, however, will depend on demand recovery. If the traditional peak season (September-October) brings orders, restocking may pick up and inventory days could increase slightly; if demand stays weak, yarn prices may continue to lag, possibly leading to margin compression.