Domestic cotton spot prices have experienced a rare sharp weekly surge: as of August 10, 3128B grade cotton stood at 17,952 yuan/ton, up 2.93% in a week. The rally is not driven by a single factor but by the combined effect of extreme heat in Xinjiang and high premiums in state reserve cotton auctions. Meanwhile, downstream textile demand remains weak, spinning margins are narrowing, and the supply chain shows clear divergence.
Heat and Reserve Auctions Fuel Price Surge
From August 3 to 6, core cotton-growing areas in Xinjiang suffered persistent extreme heat, with temperatures exceeding 40°C in Turpan, Hami, and southern Bayingolin, and local extremes surpassing 45°C. This period coincides with the critical flowering-to-boll-setting stage, where high temperatures accelerate water evaporation, weaken pollination, and increase the probability of flower and boll shedding. Market concerns over new-crop yields have intensified.
Supply-side tension was fully reflected in state reserve auctions. In the week of August 3-7, all 40,100 tons of reserve cotton offered were sold, maintaining a 100% transaction rate. The average transaction price was 17,014 yuan/ton, equivalent to 17,663 yuan/ton for 3128B grade, with an average premium of 1,497 yuan per ton. Over a longer period, cumulative reserve sales reached 120,259.425 tons by August 7, with zero unsold lots and an average price of 17,173.33 yuan/ton. High premiums and zero failed auctions indicate tight spot supply and steady downstream restocking demand.
Widening Margin Squeeze Across the Chain
The strength in raw materials contrasts sharply with downstream weakness. Orders for apparel and home textiles remain sluggish, traders and fabric mills are cautious, and yarn mills focus on destocking, only slightly testing price increases. Main shipments are concentrated in medium-count carded, combed, and compact yarns.
The core contradiction is that cotton price gains far outpace yarn price increases, narrowing the spread and compressing spinning profits. Under profit pressure, mills are hesitant about high-priced new cotton and are controlling restocking volumes. To offset high costs, many small and medium-sized mills are turning to state reserve auctions, which offer better cost efficiency than market cotton, helping lower overall cotton procurement costs.
Short-Term Outlook: Divergence to Persist
In the short term, bullish factors remain dominant: persistent heat threatens new-crop output, and high reserve premiums reflect tight spot supply. However, weak downstream demand is unlikely to recover quickly, and mills' profit pressure and cautious purchasing will continue to cap upside price movement. The "strong raw materials, weak finished goods" pattern is likely to persist.
For all parties, this means balancing cost control and inventory management. Mills need to find a balance between cost control and inventory management, while traders should be wary of high-level pullback risks. Key factors to monitor include Xinjiang weather evolution, reserve auction pace, and downstream order recovery.