International and domestic cotton prices diverged sharply this week: overseas futures surged 3.67% in a single day to a two-year high, while domestic Zhengzhou futures retreated after an initial rally, gaining only 0.7% for the week. The price gap narrowed by 547 yuan/ton to 1,743 yuan/ton. This convergence reflects not domestic strength but a combination of weather premiums abroad and policy/consumption constraints at home, signaling a new market rebalancing.
Weather Premium vs Policy Constraints
The rally in international prices was driven by supply-side factors. USDA data showed US cotton good-to-excellent ratings fell to 37% as of Aug 23, a fifth consecutive weekly decline; drought-affected areas rose from 44% to 52%, with Texas dryness expected to persist. Combined with over 90% probability of a very strong El Nino for autumn-winter and India's monsoon rainfall possibly the lowest since 2009, global supply contraction fears intensified. NY futures main contract averaged 90.02 cents/lb, up 3.2% on week, while import parity costs rose 4.3%.
Domestic response was muted. Zhengzhou main contract averaged 17,033 yuan/ton, only 0.7% higher. Xinjiang cotton boll opening advanced, and crop-cut concerns remain unverified, but reserve sales continued at 100% offtake, totaling over 240,000 tons, effectively supplementing supply. More critically, new crop arrivals are earlier than usual, heightening expectations of seasonal supply pressure and capping gains. The narrowing spread to 1,743 yuan/ton reduces the appeal of imported cotton, prompting domestic mills to recalibrate procurement strategies.
Profit Divergence and Demand Transmission
Macro headwinds include threats of additional 7.5% US tariffs on Chinese goods and hawkish signals from Fed Chair Warsh. Combined tariffs on Chinese textile/apparel exports to the US already range 20-37.5%; further hikes would intensify order diversion risks. NBS data show textile industry profits up 7.9% for Jan-Jul, but growth slowed markedly; apparel profits narrowed losses to -17.2%, still contracting; chemical fiber profits surged 107.7%. This divergence underscores structural difficulties in passing costs downstream.
Cotton yarn prices followed weakly: domestic C32S combed yarn rose only 0.1%, while imported yarn gained 0.7%, flipping the domestic-import spread to +46 yuan/ton. Spinners face squeezed margins between rising raw material costs and weak end demand. Surveys at the Shanghai Yarn Expo showed order divergence and cautious sentiment, with concerns over delayed peak season windows.
Outlook and Strategies
Short-term, international prices may stay firm on weather support but face pullback risks if weather eases or funds exit. Domestic prices likely remain high-range, supported by crop-cut expectations and seasonal demand, yet capped by reserve sales and new crop arrivals. With the narrowing spread, import attractiveness diminishes; domestic mills must balance purchase timing and inventory strategies.