Cotton futures surged again on August 6, with the main Zhengzhou Cotton Exchange (ZCE) contract for September 2026 (CF2609) settling at 16,150 yuan per ton, up 185 yuan from the previous session. Cotton yarn futures followed suit, with the main November contract (CY2611) closing at 22,625 yuan per ton, a daily gain of 145 yuan. However, spot market sentiment remained markedly subdued, as pure cotton yarn mills kept their raw material inventory at 30.11 days, unchanged from the prior month, with most mills purchasing on an as-needed basis.
Price-Inventory Divergence
The contrast between strong futures and cautious spot activity is the most striking feature of the current cotton textile supply chain. The futures rally is largely driven by capital flows, evidenced by elevated trading volumes and open interest, signaling strong short-term market expectations. Yet the industry's response has been tepid: yarn mills have not increased inventory days despite higher prices, indicating that buyers do not accept current levels and prefer to consume existing stocks. This divergence implies that cost support has not effectively transmitted downstream, and the upward price movement lacks solid demand fundamentals.
Historically, when futures rise more than 3% while spot inventory remains flat, the market often enters a wait-and-see phase. Current raw material inventory of around 30 days is at a neutral-to-high level, sufficient to cover roughly a month of production, so mills feel no urgency to restock. This 'grain in hand' mentality directly undermines the sustainability of price gains.
Deep Reasons for Stalled Cost Pass-Through
Rising cotton prices should theoretically lift cotton yarn costs and subsequently yarn prices. But in reality, cotton yarn futures have risen less than cotton, narrowing the price spread and reflecting limited downstream acceptance. Terminal apparel orders have not shown significant growth, weaving mills maintain steady but unremarkable operating rates, and purchases of cotton yarn are mostly for immediate needs, lacking speculative stocking. Additionally, substitute fibers like polyester staple fiber retain a price advantage, diverting some orders to blended yarns and further squeezing the market share of pure cotton yarn.
From a production belt perspective, mills in major cotton yarn regions such as Shandong and Henan report difficulty in raising prices on new orders, compressing profit margins. Some enterprises are adjusting product mixes, increasing blended yarn output rather than expanding pure cotton yarn production. These micro-level decisions, in turn, suppress demand for raw cotton, creating a negative feedback loop.
Outlook and Operational Strategies
In the short term, cotton futures strength may persist given the bullish technical and fund positioning. However, fundamental constraints cannot be ignored: the arrival of new cotton supply is approaching, gradually adding pressure, while downstream demand is unlikely to improve significantly in the tail end of the traditional off-season. Therefore, the risk of a pullback after a rally is accumulating, and enterprises should avoid blindly chasing highs.
For cotton yarn mills, the focus should be on basis changes rather than absolute futures prices. When the futures premium expands, mills may consider selling futures to hedge processing margins; conversely, if the basis narrows to a reasonable range, they can moderately increase spot inventory. Additionally, using option strategies can provide protective measures, controlling costs while retaining upside potential if prices fall.