Narrowing Cotton Price Gap Signals Deepening Profit Imbalance in Textile Chain

While international cotton prices surged 3.2% in a single week to hit a near two-year high, China's Zhengzhou cotton futures only managed a 0.7% gain, narrowing the price gap between domestic and foreign cotton by 547 yuan per ton within a week. This figure reflects a fierce tug-of-war between weather-driven speculation in raw materials and weak downstream consumption, signaling a profound shift in profit distribution across the textile chain.

Event Background

The direct driver of this week's international cotton rally came from the supply side. USDA data showed U.S. cotton crop condition ratings fell to 37% as of August 23, marking the fifth consecutive weekly decline, while the drought-affected area in cotton regions rose from 44% to 52%. Combined with a more than 90% probability of a "very strong" El Niño event in the Northern Hemisphere autumn and winter, and India's monsoon rainfall potentially hitting a 2009 low, global cotton supply contraction expectations intensified. NY futures surged 3.67% on August 27 to 92.75 cents per pound, the highest since April 2024.

Meanwhile, macro headwinds emerged. Fed Chair Warsh delivered a hawkish speech at Jackson Hole, emphasizing the 2% inflation target as "firm and fixed," fueling rate hike expectations and higher long-term yields, which pressured commodity prices. More notably, the U.S. is considering additional tariffs of 7.5% on Chinese goods under the pretext of "overcapacity." With existing combined tariffs on Chinese textile and apparel exports to the U.S. already at 20%-37.5%, further tariffs would weaken export competitiveness and dampen downstream demand for cotton.

Industry Impact

The rapid narrowing of the domestic-international cotton price gap reflects a divergence in fundamentals. Domestically, concerns over Xinjiang's output reduction remain unverified, but reserve cotton sales continued, with cumulative sales exceeding 240,000 tons as of August 28, easing the temporary supply tightness. New cotton harvest is expected earlier than usual, with some machine-picked fields already 40%-50% open. Downstream mills remain cautious in purchasing, as higher cotton prices fail to pass through, squeezing margins.

Profit differentiation across the chain confirms this picture. National Bureau of Statistics data show that from January to July, industrial profits rose 17.6% year-on-year, with chemical fiber manufacturing surging 107.7%, while textile industry profit growth slowed from 16.6% in the first half to 7.9%, and textile apparel profits, though narrowing losses to -17.2%, remained in contraction. The structural contradiction of cost pass-through failure persists.

On the trade front, India's cotton imports provided additional support to international prices. India imported 96,000 tons in June, up 175% year-on-year, with cumulative imports reaching 1.079 million tons, exceeding the USDA's forecast of 1.043 million tons. Meanwhile, Brazil's harvest reached 70.5%, 10.2 percentage points ahead of last year, partially offsetting Northern Hemisphere supply concerns.

Practical Recommendations

For Purchasers - Monitor the narrowing price gap; if it shrinks further, consider increasing import cotton purchases to lock in costs. - Closely track Xinjiang weather and production data; if output reduction expectations are disproven, domestic prices may face downward pressure—avoid chasing highs. - Use futures hedging to manage raw material price volatility, especially amid macro uncertainty; set stop-loss levels.

For Exporters - Assess the potential impact of U.S. tariffs and adjust export market structure, expanding into Southeast Asia and the Middle East. - Watch RMB exchange rate and Fed policy; rate hike expectations may cause currency fluctuations—consider hedging. - Optimize product mix toward higher value-added items to mitigate profit squeeze from rising raw material costs.