In the second week of August, the domestic cotton spot market experienced a rare unilateral rally. By August 10, 3128B grade cotton was quoted at 17,952 CNY/ton, up 2.93% in a week. The driving forces were not traditional demand but a double supply squeeze: extreme heat in Xinjiang and a rush for state reserve cotton. For textile mills, rising raw material costs combined with weak terminal orders mean further margin compression and a subtle shift in bargaining power along the chain.
Heatwave Fuels Production Cut Expectations
Xinjiang's core cotton areas are in a critical window for yield determination. From August 3 to 6, persistent extreme heat hit Turpan, Hami, and southern Bazhou, with temperatures exceeding 40°C and local extremes above 45°C, coinciding with the peak flowering and boll-setting stage. Heat accelerates water evaporation, weakens pollination, and raises the probability of flower and boll shedding, fueling market concerns over lower yields and providing fundamental support for prices.
This weather event is not a short-term blip. Historical data shows that extreme heat during boll-setting often causes irreversible shedding, and even if temperatures cool later, early damage is hard to repair. Therefore, production cut expectations will not dissipate quickly and may strengthen with further weather developments, offering sustained price support.
High Premiums in Reserve Auctions Reflect Tight Spots
Parallel to weather, state reserve cotton auctions saw robust demand. From August 3 to 7, all 40,100 tons offered were fully transacted, with an average price of 17,014 CNY/ton, equivalent to 17,663 CNY/ton for 3128B grade, and a premium of 1,497 CNY/ton. Cumulatively through August 7, reserve sales reached 120,259 tons at an average price of 17,173 CNY/ton, with zero failed auctions.
High premiums and full clearance underscore tight spot supply and steady downstream restocking demand. Reserve cotton offers better value than market cotton, attracting many small and medium mills to lower their blended costs. This behavior is essentially a hedge against raw material price spikes and confirms limited available spot resources, keeping supply-demand tensions unresolved.
Mills' Margins Squeezed, Procurement Turns Defensive
In stark contrast, downstream textile markets remain in the off-season. Apparel and home textile orders are weak, traders and weavers are cautious, and yarn mills focus on destocking, with only small test price increases. Main product lines are mid-count carded, combed, and compact yarns.
The core contradiction is that cotton price gains far outpace yarn price hikes, narrowing spinning margins. As profits shrink, mills resist high-priced new cotton, adopt a wait-and-see attitude on spot purchases, and control raw material restocking. This defensive stance exacerbates concerns about short-term supply-demand dynamics.
For mills, the most practical approach is to adjust raw material mix, increase reserve cotton usage, and optimize product portfolios toward higher-value-added items to alleviate cost pressure. In the long run, if terminal demand remains weak and cost pass-through fails, smaller mills will face greater operational strain, potentially accelerating industry consolidation.
Short-Term Pattern of Strong Raw Materials, Weak Finished Products Likely to Persist
Overall, bullish factors dominate in the short term: heat threatens Xinjiang output, production cut expectations persist, and high premiums in reserve auctions reflect tight spots, supporting prices. However, weak downstream demand, squeezed mill margins, and cautious procurement will cap upside potential.
In the coming weeks, cotton prices are likely to remain elevated and volatile, with profit distribution favoring upstream. Buyers and foreign trade firms should closely monitor weather impacts on final yields and changes in reserve auction schedules, adjusting procurement and pricing strategies flexibly.