Price difference between cotton and other fibers continues to widen

From end Mar, ZCE major cotton contract has risen from 14,000yuan/mt to 17,300yuan/mt, up by 3,300yuan/mt, mainly driven by supply side and various speculations. The capital continues to push up cotton prices. On the night of Jul 18, the state cotton reserves sales policy was announced, but the specific details have not been released. In face of the higher cotton prices, downstream spinners' operation status gradually turns weaker, and product inventory piles up. Operating rate of spinning mills continues to drop, especially the heavy losses. Currently, cotton yarn mills face several situations: 1) most spinners in inland face heavy losses, over 2,000yuan/mt on theory. Spinners in Xinjiang see less losses, but also step into losses. 2) Cotton yarn inventory is gradually accumulating, and the trend may sustain for a period. 3) Cotton yarn inventory at traders' hand and supply chain like is high, and some costs are low, so spinners may face difficulties in selling later. 4) Cotton inventory in spinning mills is not high. Some spinners have less cotton inventory, and to slow down the cotton consumption speed, they turn to produce high-count cotton yarn. 5) Possible power rationing may appear this year. Based on above conditions, operating rate of spinning mills is very likely to reduce further in the future.

The weakening operation status of cotton yarn mills may make the substitution effect of other fibers for cotton strengthen. This year, driven by supply factors, the price of cotton has been continuously rising, especially after Apr. In contrast, the changes in PSF and VSF prices have been relatively moderate. As a result, the price spread between cotton and other fibers have gradually widened. Currently, the price spread between cotton and PSF has exceeded 10,000yuan/mt, and the spread between cotton and VSF has reached more than 5,200yuan/mt. Moreover, this price spread trend has not shown significant narrowing.

During the fourth quarter of 2021 and the first half of 2022, the high price of cotton in China strengthens the substitution effect of other fibers for cotton, and from a cost perspective, there is already a driving force for switching to other varieties currently. However, the current market is in the traditional slack season, with generally fewer orders. Therefore, the motivation for spinners to switch production is also limited. But with sample production in Aug and the release of orders during the traditional peak season, if the current price spread is maintained, the substitution among fibers will be further strengthened.