In July, domestic cotton prices peaked then fell, while international prices strengthened, narrowing the domestic-international spread to RMB 2,808/ton, down RMB 221 from the previous month. This contrast reflects reserve sales filling short-term supply gaps, while global supply-demand tightening supported the external market. For textile mills, raw material cost pressure eased somewhat, but rising finished goods inventories and sluggish yarn prices are squeezing margins.
Supply-Demand Balance: Output Downgrade Meets Resilient Consumption
The China Cotton Association forecasts 2026/27 production at 7.15 million tons, down 3.5% YoY, and consumption at 8.92 million tons, up 1.7%. The output decline exceeds consumption growth, lowering ending stocks to 6.236 million tons, down 2.5%. Imports are expected at 1.62 million tons, up 1.3%, but July imports were only 92,000 tons, down 16.6% MoM, indicating cautious buying.
By region, Xinjiang output is 6.857 million tons, down 3.5%, with yields flat. The Yellow River region yields up 2.6%, while the Yangtze region output may drop 14.3% due to excess rain. Overall yield edged up 0.4%, suggesting weather disruptions had limited impact, and market concerns over production losses may be overblown.
Industry Transmission: Xinjiang Capacity Agglomeration vs. Off-Season
July national yarn output was 1.814 million tons, down 2.2% YoY and 5.9% MoM, but Xinjiang produced 321,000 tons, up 17% YoY. This confirms the ongoing shift of textile capacity to Xinjiang, squeezing smaller inland mills. Xinjiang's advantages in raw materials and energy are reshaping the industry landscape.
Yarn prices struggled to follow cotton gains. Domestic 32-count pure cotton yarn averaged RMB 23,328/ton, down RMB 8 MoM, but up 13.33% YoY. Downstream mills resisted price hikes, compressing spinning margins. July textile and apparel exports were USD 28.79 billion, down 1.6% MoM, with cotton product exports at USD 5.99 billion, down 7.3% MoM, including an 11.9% drop to the EU, signaling weak overseas orders.
Reserve Sales: Short-Term Fill and Long-Term Signal
Reserve cotton sales started July 20, with 80,200 tons sold by July 31, fully subscribed, with an average premium of RMB 1,638/ton. Early premiums were high, but later rationalized. The sales filled the gap before new crop harvest, though some small mills lacking import quotas bought imported reserve cotton, driving higher premiums.
Inventories: commercial stocks at 2.5 million tons, down 19.4% MoM but up 14.1% YoY; industrial stocks at 888,000 tons, up 2.3% MoM. Commercial destocking accelerated, while industrial stocks rose slightly, indicating mills replenished at low prices but remained cautious.
International Transmission: Tight Balance and Import Shift
USDA's August report cut global supplies by 119,800 tons, raised production by 80,600 tons, and reduced ending stocks by 326,600 tons, lowering the stocks-to-use ratio to 56.7%. Tighter global supply supported international prices. The Cotlook A index averaged 88.9 cents/lb, up 3% MoM, equivalent to RMB 14,887/ton after 1% duty, still RMB 2,808 below domestic prices, reducing foreign cotton attractiveness.
Import origins shifted: Australian cotton surged to 59.8% of imports, up 31.9 percentage points MoM; Brazil and US accounted for 18.8% and 6.7%. The Australian share jump reflects preference for high-grade cotton and accelerated import diversification amid trade uncertainty.
Outlook and Risks
With new crop approaching, seed cotton opening prices are expected to be high. Short-term cotton prices may rise, but weak downstream demand and rising inventories could cap gains. Textile mills face continued margin pressure from high raw material costs and soft end-demand.