Heat and Tight Reserve Supplies Squeeze Cotton Market, Widening Gap Between Raw Fiber and Finished Yarn

In mid-August, China's cotton market presents a striking picture of divergence: raw fiber spot prices jumped nearly 3% in a single week, while downstream yarn prices remained flat, squeezing spinners' margins. This structural split is reshaping procurement strategies and inventory management across the supply chain.

Background

The immediate trigger was extreme heat in Xinjiang's key cotton-growing areas during the critical boll-setting stage. From August 3 to 6, temperatures in Turpan, Hami, and southern Bazhou exceeded 40°C, with local peaks above 45°C, coinciding perfectly with the golden growth period for flowering and boll expansion. The heat accelerates field moisture evaporation and weakens pollination, raising concerns about reduced yields and tightening future supplies.

Meanwhile, reserve cotton auctions saw full subscription and high premiums. During the week of August 3-7, all 40,100 tonnes offered were sold, with an average price of 17,014 yuan per tonne (equivalent to 17,663 yuan per tonne for 3128B grade), a premium of 1,497 yuan per tonne. As of August 7, cumulative reserve sales reached 120,259 tonnes with a 100% transaction rate, at an average price of 17,173 yuan per tonne. High premiums reflect tight spot supplies and steady downstream restocking demand.

Industry Impact

The strong raw material market contrasts sharply with weak downstream demand. It is the traditional off-season for textiles, with sluggish orders for apparel and home textiles. Weaving mills and traders are cautious, while yarn mills focus on destocking and keep prices stable, only slightly testing increases. This mismatch between rising fiber costs and flat yarn prices has narrowed spinning margins, intensifying operational pressure.

Facing high cotton prices, many spinners resist expensive new crop and adopt a wait-and-see attitude toward spot purchasing, controlling raw material inventories. To offset costs, numerous small and medium-sized mills have shifted to reserve cotton auctions, which offer better value than market cotton and help lower overall fiber costs. This strategy, in turn, supports the high premiums at auctions.

As of August 10, domestic 3128B grade cotton spot prices reached 17,952 yuan per tonne, up 2.93% in a week. In the near term, bullish factors dominate: persistent heat in Xinjiang threatens yields, and high reserve auction premiums indicate tight spot supply. However, weak downstream demand and cautious purchasing will cap price gains, maintaining a "strong raw, weak finished" pattern.

Overall, the cotton market is likely to sustain this divergence in the short term. For all chain participants, this means higher raw material cost volatility, while the pace of order recovery will be the key variable. Spinners must find a new balance between cost control and inventory turnover, while traders should be wary of pullback risks.

Practical Advice

For Buyers - Monitor Xinjiang weather and new crop progress; if heat persists, consider locking in forward volumes early but avoid speculative hoarding. - Utilize reserve cotton auctions, comparing converted prices with spot quotes, and restock in batches to lower average costs. - Negotiate long-term pricing agreements with yarn suppliers to share raw material risk and reduce unilateral exposure.

For Foreign Trade Companies - Include raw material price adjustment clauses in quotes or use short-term pricing to mitigate volatility risks. - Watch RMB exchange rates and domestic-import price spreads; if the gap widens, consider imported cotton as an alternative to balance costs. - Communicate cost pressures to end brands and seek reasonable price increases in orders to avoid continued margin erosion.