[Summary] This week, international cotton prices broke through previous highs, driven by multiple bullish supply-side factors: a continued decline in the "good-to-excellent" rating of the U.S. cotton crop, expanding drought conditions, and growing expectations of a super El Niño event. Domestic cotton prices initially surged in tandem with overseas markets but subsequently retreated; the tug-of-war between long and short positions intensified, and the price spread between domestic and international cotton narrowed significantly.

I. Price Review

In the international market, the combined impact of worsening drought in U.S. cotton-growing regions and expectations of El Niño weather—compounded by a temporary weakening of the U.S. dollar—pushed international cotton prices higher. On August 27, the benchmark New York cotton futures contract surged 3.67% to 92.75 cents per pound, hitting a new high since April 2024. The average settlement price for the benchmark contract this week was 90.02 cents per pound, up 2.83 cents (3.2%) from the previous week. The average International Cotton Index (M)—representing the landed cost of imported cotton at major Chinese ports—stood at 97.99 cents per pound; the converted import cost in RMB was RMB16,407 per tonne (calculated at a 1% tariff rate, excluding port miscellaneous charges and inland freight), an increase of RMB679 per tonne (4.3%) from the previous week.

In the domestic market, cotton prices initially dipped before rising, resulting in a slight overall increase in the average price. Driven by strength in overseas markets and supported by concerns over reduced production in Xinjiang, the main Zhengzhou Cotton (ZCE) contract fluctuated with an upward bias near the 17,000 RMB/tonne mark early in the week. After a mid-week technical correction, prices dipped slightly but surged to 17,345 RMB/tonne on August 28, buoyed by a sharp rise in US cotton prices; intraday trading saw a spike followed by a pullback amidst intense long-short contention. The weekly settlement average price was 17,033 RMB/tonne, up 120 RMB/tonne (0.7%) from the previous week. The average "China Cotton Price Index B" (representing the market price of standard-grade lint in inland China) stood at 18,150 RMB/tonne, up 132 RMB/tonne (0.7%). Domestic cotton prices exceeded international prices by 1,743 RMB/tonne, with the price gap narrowing by 547 RMB/tonne compared to the previous week.

In the textile market, prices for both domestic and imported yarns rose slightly, with imported yarns showing relatively stronger momentum. The average market price for domestic C32S carded yarn was 23,548 RMB/tonne, up 34 RMB/tonne (0.1%); the average price for C32S carded yarn from major import sources was 23,594 RMB/tonne, up 156 RMB/tonne (0.7%). Conventional imported yarn was priced 46 RMB/tonne higher than domestic yarn, while the price of polyester staple fiber rose by 85 RMB/tonne to 7,849 RMB/tonne.

II. Market Outlook

Regarding the macro environment, US tariff threats have unsettled market sentiment, and Federal Reserve official Warsh has signaled a hawkish stance. Citing "overcapacity," the US government is considering imposing an additional 7.5% tariff on imports from China. Currently, the aggregate tariff rate on Chinese textile and apparel exports to the US already ranges from 20% to 37.5%; any additional tariffs would further erode the competitiveness of Chinese textiles and apparel in the US market and potentially dampen downstream demand across the cotton industry chain. On August 27, a spokesperson for the Ministry of Commerce responded by stating that the US actions represent typical unilateralism and protectionism, to which China is firmly opposed. On August 28, Federal Reserve Chair Powell delivered his first keynote speech since taking office at the Jackson Hole Economic Symposium. He emphasized that the 2% inflation target remains "firm and fixed," noting that while inflation improved slightly this summer, there was "no meaningful trend of improvement." He indicated that further interest rate hikes might be necessary if insufficient progress is made in easing price pressures. Meanwhile, Powell explicitly declined to provide forward guidance; consequently, market expectations for rate hikes intensified, long-term bond yields rose again, and the resulting tightening of financial conditions exerted short-term downward pressure on commodity prices. Profits for domestic industrial enterprises continued to grow, though the growth rate in the textile industry slowed significantly. Data from the National Bureau of Statistics shows that profits for industrial enterprises above designated size rose 17.6% year-on-year from January to July. Within this sector, textile industry profits grew by 7.9%—a marked deceleration from the 16.6% growth seen in the January–June period. The profit decline in the textile and apparel sector narrowed from 28.0% (January–June) to 17.2%, while profits in the chemical fiber manufacturing industry surged 107.7%. These figures reveal a clear divergence in profitability across the supply chain: strong earnings at the chemical fiber raw material stage, slowing growth in textile processing, and continued contraction in the apparel segment. Structural imbalances—specifically the difficulty of passing costs downstream—remain pronounced, and the slow recovery of end-consumer demand continues to constrain industry profitability.

In the cotton market, weather disruptions persist in the Northern Hemisphere, while the arrival of new-crop cotton from the Southern Hemisphere is accelerating; imports of Indian cotton surged in June as anticipated. USDA data indicates that the "good-to-excellent" rating for U.S. cotton crops fell to 37% for the week ending August 23, marking the fifth consecutive week of decline. Recent drought alerts show the proportion of drought-affected cotton-growing areas rising from 44% to 52%. Drought conditions in Texas are expected to persist over the coming month, placing further downward pressure on yield and total production forecasts. Additionally, the probability of a "very strong" El Niño event occurring in the Northern Hemisphere during the autumn and winter has risen above 90%. The India Meteorological Department projects that total rainfall during this year's monsoon season could be approximately 15% below the long-term average—the lowest level since 2009—posing a threat to cotton production. The pace of new crop market arrivals in Brazil is expected to accelerate; as of August 21, the cotton harvest rate reached 70.5%, up 10.9 percentage points month-on-month and 10.2 percentage points year-on-year. India saw a surge in cotton imports during the first month of its duty-free policy, with June imports hitting 96,000 tonnes—a 175% year-on-year increase. Cumulative imports for the current marketing year reached 1.079 million tonnes, surpassing the USDA's August supply and demand forecast (1.043 million tonnes); sustained high import demand from India may provide some support for international cotton prices. Domestically, while high temperatures are gradually easing, expectations of reduced yields remain unrefuted, and downstream sectors are awaiting the performance of peak-season demand. Cotton in Xinjiang has entered the peak boll-opening stage, with some machine-harvested fields showing 40–50% boll opening, suggesting an earlier-than-usual market arrival for the new crop. Recent high temperatures in cotton-growing regions have moderated, and rainfall in parts of Northern Xinjiang has helped replenish soil moisture; Southern Xinjiang remains generally sunny and hot, though extreme heat is subsiding. The China International Textile Yarn (Autumn/Winter) Exhibition was held in Shanghai from August 25 to 27; surveys indicate that while market conditions have improved slightly compared to the previous month, they fall far short of the spring season's intensity, with significant divergence in enterprise orders and a prevailing wait-and-see sentiment. Some enterprises worry that a delayed peak season window would compress the effective duration, creating uncertainty regarding the timing and volume of order releases. Furthermore, the transmission of rising cotton prices to downstream sectors remains obstructed, keeping spinning mill profits under pressure and further dampening the willingness to purchase raw materials. Sales of state cotton reserves continued to see a 100% clearance rate this week, with cumulative sales exceeding 240,000 tonnes by August 28, steadily alleviating the tight supply situation.

In summary, in the short term, supply disruptions due to weather conditions in the Northern Hemisphere persist, and with stable purchasing demand, international cotton prices may experience strong, volatile fluctuations; however, caution is warranted regarding potential pullbacks driven by easing weather risks, macroeconomic variables, and profit-taking by capital. On the domestic front, concerns over production cuts combined with expectations of peak-season demand are supporting cotton prices; however, the release of state reserves and the impending arrival of the new crop are likely to cap further gains, suggesting that prices will continue to fluctuate at high levels. Key factors to monitor include actual peak-season demand and realized production volumes. (Source: China Cotton Network)

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