The spread between domestic and international cotton prices narrowed by 547 yuan per ton in one week to 1743 yuan per ton—a figure that reflects a head-on clash between global supply shocks and domestic regulatory pressure. When New York futures surged 3.67% in a single day, Zhengzhou cotton only briefly followed before retreating, revealing intense long-short battles beneath the surface.
Supply Side: Weather and Policy as Dual Variables
US cotton crop conditions deteriorated, with good-to-excellent ratings falling for five consecutive weeks to 37%, and drought-affected areas rising from 44% to 52%. Texas is expected to remain dry for the next month. Meanwhile, the probability of a 'very strong' El Nino event in the Northern Hemisphere autumn/winter has exceeded 90%, and India's monsoon rainfall may hit its lowest since 2009, reinforcing global supply contraction expectations. Brazil's harvest is progressing faster than last year by 10.2 percentage points, partially offsetting Northern Hemisphere concerns.
India's duty-free policy led to a surge in cotton imports, with June imports reaching 96,000 tons, up 175% year-on-year, and cumulative imports exceeding the USDA's full-year forecast. This indicates solid international buying interest, providing strong support for cotton prices. However, if weather risks ease temporarily, profit-taking could trigger a pullback; the external market is not without downside risks.
Downstream Transmission: Profit Divergence and Cost Obstruction
National Bureau of Statistics data show textile industry profits grew 7.9% year-on-year from January to July, slowing significantly from the first half. Textile and apparel profits narrowed their decline to -17.2%, still in contraction. In contrast, chemical fiber manufacturing profits surged 107.7%, indicating profit concentration upstream while terminal consumption recovers slowly. The structural contradiction of poor cost transmission persists.
Cotton price increases have not effectively passed through to yarn prices; domestic C32S yarn rose only 0.1% weekly, while imported yarn rose 0.7%, turning the spread positive and enhancing domestic yarn competitiveness. However, spinners' margins remain squeezed, limiting purchasing willingness. The key variable is whether peak-season orders materialize as expected. Surveys at the Shanghai Yarn Expo show improvement from last month but far below spring heat, with differentiated orders and heavy wait-and-see sentiment.
Policy and Macro: Tariff Shadows and Rate Hike Expectations
The US is considering an additional 7.5% tariff on Chinese goods, citing 'overcapacity.' Current combined tariffs on Chinese textile and apparel exports to the US already range from 20-37.5%; further tariffs would weaken export competitiveness and suppress downstream cotton demand. The Ministry of Commerce has expressed firm opposition, but trade policy uncertainty will continue to disturb market sentiment.
Fed Chair Warsh signaled a hawkish stance at Jackson Hole, emphasizing the 2% inflation target as 'firm and fixed,' and suggesting further rate hikes if price pressures do not improve. Tightening financial conditions exert periodic pressure on commodities, capping cotton's upside. Domestically, reserve cotton sales continue with 100% transaction rates, with cumulative sales exceeding 240,000 tons, improving the tight supply situation, but new crop harvest is expected earlier, adding supply pressure.
Industry Impact: Deeper Meaning of Narrowing Spread
The narrowing spread to 1743 yuan per ton implies reduced cost advantage of imported cotton, potentially shifting spinners toward domestic cotton or chemical fibers. Widening cotton-chemical fiber price gaps may prompt blended yarn producers to adjust raw material mixes. For traders, the narrowed spread compresses arbitrage opportunities, requiring more refined position management.
In the short term, international cotton prices may remain firm, but domestic prices face limited upside due to reserve sales, approaching new crop, and weak downstream demand. High cotton prices may exacerbate profit distribution imbalances, squeezing downstream spinners caught between high raw material costs and difficulty raising product prices.