While international cotton prices surged past 92 cents per pound on drought and El Nino expectations, hitting a two-year high, the domestic Zhengzhou futures only managed a modest 0.7% weekly gain. The price gap between domestic and international cotton narrowed by RMB 547 per ton to RMB 1,743 per ton within a week. This divergence reveals not simply a lack of follow-through but a market being pulled by policy reserves, new crop arrivals, and weak terminal demand.
Market Background
The external market has clear weather-driven support. USDA data show U.S. cotton good-to-excellent ratings fell for a fifth consecutive week to 37%, with drought-affected areas rising from 44% to 52%. Texas drought is expected to persist. Combined with over 90% probability of a very strong El Nino in the northern hemisphere autumn-winter and India's monsoon rainfall potentially the lowest since 2009, supply concerns amplified speculative buying, pushing NY futures up 3.67% on August 27.
Domestic response was more restrained. Zhengzhou futures averaged RMB 17,033/ton, up only 0.7%, and retreated after spiking to RMB 17,345/ton on August 28. Behind this gap are different supply-demand fundamentals: Xinjiang production cut expectations remain unverified, but reserve cotton sales have totaled over 240,000 tons with 100% transaction rates, filling supply gaps. Meanwhile, new crop arrivals are expected earlier, with some machine-picked fields already 40-50% open.
Industry Impact
Price transmission is clearly blocked downstream. National Bureau of Statistics data show textile industry profits grew 7.9% in Jan-Jul, down sharply from 16.6% in H1; textile and apparel profits narrowed losses to -17.2% but remain in contraction; while chemical fiber profits surged 107.7%. This "upstream feast, midstream snack, downstream famine" pattern means cotton cost increases cannot pass through to yarn and garments, squeezing spinners' margins and suppressing purchasing.
For buyers, the narrowed gap to RMB 1,743/ton reduces the appeal of imported cotton. At 1% tariff, imported cotton costs about RMB 16,407/ton, while domestic B-index averages RMB 18,150/ton. The shrinking gap also suggests limited upside for domestic prices. Notably, imported C32S yarn now costs RMB 46/ton more than domestic, eroding import yarn's advantage and potentially redirecting orders back home.
Macro uncertainties loom. The U.S. considers additional 7.5% tariffs on Chinese goods, which would raise combined tariffs on textile/apparel exports to 27.5-45%, further pressuring demand. Fed Chair Warsh's hawkish signals and rising rate hike expectations tighten financial conditions, capping commodity prices.
Practical Recommendations
For Buyers - Monitor the domestic-international gap; if it narrows below RMB 1,500/ton, prioritize domestic cotton to lock costs and avoid currency/shipping risks. - With new crop and reserve sales approaching, buy in batches on dips; consider increasing point-priced contracts. - Compare domestic vs. imported C32S yarn; current foreign yarn is slightly pricier, so shift to imports only if the gap exceeds RMB 200/ton.
For Exporters - Assess the impact of potential U.S. tariff hikes; diversify export markets toward Southeast Asia and the Middle East. - Use the narrowed price gap to renegotiate contracts with overseas clients, passing on some cotton cost increases. - Watch India's import surge; if demand stays strong, international prices may find support, so lock in forward contracts early.
The window for verifying seasonal demand is closing. With accelerating Xinjiang boll opening, continued reserve sales, and earlier new crop arrivals, three supply pressures limit upside. However, weather risks and macro shifts could still cause volatility. The final arbiter of profit redistribution in the textile chain will be the recovery pace of end-consumer demand.