In July, domestic cotton prices surged then retreated, while the domestic-international price spread narrowed to 2,808 yuan per ton. Meanwhile, yarn output in Xinjiang jumped 17% year-on-year. This contrast highlights a structural rebalancing: reserve releases fill supply gaps, Xinjiang's capacity expansion reshapes regional dynamics, and off-season inventory buildup caps price upside. For textile chain players, understanding the rhythm of rebalancing matters more than predicting price levels.
Supply-Demand: Tight Balance and Divergent Price Expectations
The China Cotton Association forecasts 2026/27 output at 7.15 million tons, down 3.5% year-on-year, while consumption rises 1.7% to 8.92 million tons. The supply-demand gap widens to 1.77 million tons, relying on imports and stocks. Imports are projected at 1.62 million tons, up 1.3%, and ending stocks fall 2.5% to 6.236 million tons. This implies a tight balance, with short-term prices supported and seed cotton opening prices likely high.
However, the tight balance is not absolute. July saw typical off-season weakness, with autumn/winter orders not yet placed and finished goods inventories building. National yarn output fell 5.9% month-on-month to 1.814 million tons, though Xinjiang's output rose 17% year-on-year to 321,000 tons. Cotton yarn prices struggled to follow cotton gains; 32s combed yarn averaged 23,328 yuan per ton, down 8 yuan month-on-month but up 13.3% year-on-year. Downstream mills resist price hikes, compressing margins and blocking cost pass-through.
Reserve Releases and Import Substitution
Reserve cotton sales started on July 20, with 80,200 tons sold by July 31, all offered lots transacted. The average price was 17,253 yuan per ton, equivalent to 17,871 yuan for Grade 3128B, with an average premium of 1,638 yuan. Small mills lacking import quotas used imported reserve cotton to access foreign fiber, paying higher premiums. As releases continued, bidding became more rational, and premiums narrowed.
Reserve sales supplemented supply and substituted for imports. July cotton imports fell 16.6% month-on-month to 92,000 tons but rose 72.5% year-on-year. Australian cotton arrivals surged, accounting for 59.8% of imports, up 31.9 percentage points; Brazil and the US held 18.8% and 6.7%, respectively. The narrowing price spread reduced foreign cotton's attractiveness, curbing import appetite. Reserve releases thus smoothed supply while altering import dynamics.
Regional Divergence: Xinjiang Agglomeration vs. Inland Contraction
Xinjiang's planted area is down, but capacity agglomeration continues. Its yarn output rose 17% year-on-year in July, far outpacing the national average, indicating the westward shift of textile capacity persists. The association expects Xinjiang's cotton output at 6.857 million tons, down 3.5%, with yields flat. Inland areas continue to shrink: the Yellow River region's yields are expected up 2.6%, while the Yangtze region faces heavy rains, with output down 14.3%.
This divergence affects sourcing strategies. Xinjiang cotton's dominance strengthens, while inland cotton may see periodic premiums due to reduced output. Meanwhile, Xinjiang's yarn expansion intensifies competition for inland spinners. Mills relying on inland cotton should monitor weather and production risks.
Inventories and Exports: Destocking and Market Diversification Pressure
Commercial cotton inventories stood at 2.5 million tons at end-July, down 19.4% month-on-month but up 14.1% year-on-year; industrial inventories rose 2.3% month-on-month to 888,000 tons. Commercial destocking accelerated due to reserve releases and faster trader selling, while mills replenished slightly after consuming low-cost stocks.
Exports: July textile and apparel exports reached $28.79 billion, up 7.6% year-on-year but down 1.6% month-on-month. Cotton product exports fell 7.3% month-on-month to $5.99 billion. Shipments to the US and EU declined 4.2% and 11.9% month-on-month, respectively, and to Belt and Road countries fell 8.9%. Southeast Asian competition and trade policy volatility are reshaping markets. January-July exports rose 2.4% year-on-year, but the 2025/26 season's first 11 months saw a 1% decline, indicating weakening momentum.