The narrowing of the domestic-international cotton price gap by 547 yuan per ton this week is more than a price fluctuation; it signals a redistribution of profits across the cotton supply chain. While international prices broke previous highs on weather-driven supply concerns, domestic prices faced dual pressure from reserve sales and upcoming new crop arrivals, limiting upside. For textile mills, the transmission channel from raw material costs to finished product prices is narrowing, and profit competition has shifted from spinning to upstream planting and downstream chemical fibers.
Background
The strength in international cotton prices has clear supply-side logic. USDA data show US cotton good-to-excellent ratings fell to 37% as of August 23, the fifth consecutive weekly decline, with drought-affected area rising from 44% to 52% and Texas drought expected to persist. Meanwhile, the probability of a very strong El Nino in the Northern Hemisphere autumn-winter has exceeded 90%, and India's monsoon rainfall may be 15% below normal, the lowest since 2009. These factors drove NY futures up 3.67% on August 27 to 92.75 cents/lb, the highest since April 2024.
Domestic markets reacted more cautiously. Zheng cotton futures averaged 17,033 yuan/ton, up only 0.7%, significantly weaker than the 3.2% gain internationally. The China Cotton Price Index B averaged 18,150 yuan/ton, also up just 0.7%. The price gap narrowed from 2,290 to 1,743 yuan/ton, meaning imported cotton is becoming more cost-competitive, increasing substitution pressure on domestic high-grade cotton.
Industry Impact
The narrowing gap directly boosts the attractiveness of imported cotton. At a 1% tariff, imported cotton costs about 16,407 yuan/ton, 1,743 yuan lower than the domestic B index. For large mills with import quotas, adjusting procurement to increase imported cotton usage is the most rational choice. But this will further squeeze domestic high-grade cotton sales and exacerbate Xinjiang cotton inventory pressure.
Profit divergence across the chain is more telling than the price gap itself. National Bureau of Statistics data show textile industry profits grew 7.9% in January-July, down from 16.6% in January-June; textile and apparel profits narrowed to -17.2%, still in contraction; while chemical fiber profits surged 107.7%. The contrast between strong chemical fibers and weak cotton spinning highlights the structural problem of poor cost pass-through. Weak terminal consumption remains the core bottleneck.
Another variable is India. India imported 96,000 tons of cotton in June, up 175% year-on-year, with cumulative imports reaching 1.079 million tons, exceeding USDA's forecast of 1.043 million tons. Duty-free policy will keep Indian import demand high, providing additional support to international prices. But Brazil's harvest progress reached 70.5%, 10.2 percentage points faster than last year, and Southern Hemisphere supply may partially offset Northern Hemisphere production cuts.