In the last week of August, international cotton prices surged 3.67% in a single day to break resistance, while Chinese futures only rose 0.7% for the week, narrowing the price gap from 2290 yuan to 1743 yuan per ton. This sharpest narrowing in recent months signals eroding cost advantage for imported cotton, forcing domestic textile mills to recalibrate their raw material procurement strategies.
Market Context
The external rally was driven by supply-side factors. USDA data showed US cotton condition ratings fell to 37% by August 23, the fifth consecutive weekly decline, with drought-affected areas expanding from 44% to 52%. Texas drought is expected to persist for another month. Meanwhile, the probability of a very strong El Nino in autumn/winter exceeds 90%, and India's monsoon rainfall could be the lowest since 2009, fueling global supply contraction expectations.
Southern hemisphere supply is accelerating. Brazil's cotton harvest reached 70.5%, up 10.9 percentage points week-on-week and 10.2 points year-on-year. India's duty-free imports surged 175% year-on-year to 96,000 tons in June, with cumulative imports of 1.079 million tons exceeding USDA forecasts, indicating resilient international demand.
Domestically, Xinjiang cotton entered the boll-opening stage, with machine-picked fields showing 40-50% opening rates, bringing new crop to market earlier than usual. Although heatwaves eased, output reduction expectations remain unverified. A survey at the Shanghai Yarn Expo (August 25-27) showed order differentiation and cautious sentiment, with mills fearing a delayed peak season window.
Industry Impact
The narrowing price gap has structural implications. For textile mills, rising import costs reduce the cost advantage of imported cotton, but domestic prices are capped by reserve sales and new crop arrivals. This means higher raw material volatility, while yarn prices only rose 0.1%, squeezing margins further.
More striking is the extreme profit divergence. National Bureau of Statistics data for January-July shows chemical fiber profits surged 107.7% year-on-year, while textile profits slowed sharply from 16.6% to 7.9%, and apparel profits remained in contraction at -17.2%. This 'upstream booming, midstream marginal, downstream loss' pattern reflects broken cost transmission, with weak final demand as the root cause.
Macro headwinds persist. The US is considering an additional 7.5% tariff on Chinese goods, which would raise combined tariffs on textiles and apparel to 27.5-45%, undermining price competitiveness. Fed Chair Warsh's hawkish signals have raised rate hike expectations, tightening financial conditions and pressuring commodity prices.
Reserve cotton sales continue at 100% offtake, with cumulative sales exceeding 240,000 tons, alleviating tight supply. However, early new crop arrivals and reserve releases add to supply, keeping Zhengzhou cotton futures in a high-level range, supported by output concerns and pre-season stocking, but capped by policy and demand uncertainty.