While international cotton prices surged 3.2% on weather speculation, domestic prices rose only 0.7%, narrowing the price gap by 547 yuan/ton to 1,743 yuan/ton. This divergence reflects not merely weak follow-through but the dual squeeze of supply adjustments and sluggish demand in China's cotton market.
Weather Premium Drives External Market, Risks Accumulate
US cotton crop conditions worsened for a fifth consecutive week, with good-to-excellent ratings at 37% and drought-affected areas expanding from 44% to 52%. Combined with over 90% probability of a very strong El Nino in the Northern Hemisphere autumn-winter, supply concerns lifted ICE futures 3.67% in a single day to 92.75 cents/lb, the highest since April 2024. However, this weather premium depends on actual crop losses; any rainfall or better-than-expected yields could trigger a sharp correction.
Domestic Gains Capped by Reserve Sales and Weak Demand
Domestic cotton prices struggled around the 17,000 yuan/ton level, with the Zhengzhou futures average settling at 17,033 yuan/ton, up only 0.7%. Reserve sales maintained 100% turnover, with cumulative sales exceeding 240,000 tons, alleviating tight supply. Meanwhile, new crop harvesting in Xinjiang is advancing earlier than usual. Downstream textile orders remain uneven, and the peak season may not materialize as expected. Spinning mills face squeezed margins, limiting their willingness to purchase raw materials, which explains why external gains did not fully transmit to domestic prices.
Profit Divergence Across the Chain: Chemical Fibers Strong, Apparel Still Contracting
National Bureau of Statistics data show textile industry profits rose 7.9% year-on-year in January-July, a marked slowdown from earlier months. Apparel profits narrowed their decline to -17.2% but remained in contraction. Chemical fiber manufacturing profits surged 107.7%, indicating cost pressures are passing unevenly down the chain. Polyester staple fiber prices rose 85 yuan/ton to 7,849 yuan/ton, further compressing spinning margins. Buyers may increasingly shift to chemical fibers, altering long-term cotton consumption patterns.
Macro Risks and Policy Uncertainty Loom
The US is considering an additional 7.5% tariff on Chinese goods, which would raise combined tariffs on Chinese textile and apparel exports to 20-37.5%, potentially hurting competitiveness. Fed Chair Warsh's hawkish remarks have raised rate hike expectations, tightening financial conditions and pressuring commodities. Domestic industrial profits grew 17.6% overall, but textile sector growth slowed markedly, highlighting structural demand weakness.
Outlook: High-Level Volatility Likely, Watch Peak Season
In the short term, supply disruptions during the weather window may keep international prices firm, but correction risks exist if weather improves or funds exit. Domestically, output concerns and peak-season expectations provide support, but reserve sales and new crop arrivals will cap upside. Prices are likely to fluctuate at high levels. Key factors to monitor include Xinjiang production, downstream order pace, and US tariff policy developments.