Chinese cotton market: macro tailwinds fails to resolve the industrial dilemma

At the beginning of June, high-level interactions between China and the United States injected a much-needed boost into the stagnant cotton market. On June 5, a telephone conversation between China and the U.S. conveyed positive signals. This was quickly followed by Sino-U.S. economic and trade consultations held in London from June 9 to 10, during which the two sides reached a principle framework for implementing consensus. Buoyed by this macro-level positive momentum, ZCE cotton futures broke free from their previous weak oscillating pattern. The major contract, Sep contract, continued to rise, reaching a peak of 13,600yuan/mt. Currently, It has gradually stabilized within the 13,400-13,600yuan/mt range. Although market sentiment has briefly warmed, the momentum for chasing gains at high levels is clearly insufficient. As the positive impact of the consultations is gradually digested, both bulls and bears have become deadlocked at the 13,500yuan line, awaiting new directional drivers.

1. Gradual weakening of downstream market

In stark contrast to the futures market, the downstream industry is experiencing the "cold of the off-season." Sustained weakness in end-user demand has become the heaviest shackle suppressing cotton price rebounds. Currently, the operating rate of spinning mills has dropped to around 70%, with even lower rates for small and medium-sized mills outside Xinjiang. Cotton yarn inventory has gradually climbed to over 26 days. Facing futures prices of 13,400-13,600yuan/mtandfirm basis (the basis for North Xinjiang cotton, 29mm and 29gpt, is mostly above 1,400yuan/mt, and the basis for South Xinjiang Kashgar cotton, 29mm and 29gpt, is mostly above 900yuan/mt), the purchasing willingness of mills has significantly cooled. Only a few large mills are replenishing inventory in stages, while most choose to wait and see. However, overall, although the downstream has weakened month-on-month, the pressure is still relatively small year-on-year.

2. Unresolved supply concerns

Since the 2024/25 season, the relatively large downstream spinning capacity and robust operating rates have prevented a significant year-on-year decline in cotton consumption. Meanwhile, imports for the 2024/25 season are expected to be only around 1 million tons, a year-on-year drop of over 2 million tons, which has gradually tightened cotton inventories. Currently, the downstream industry's weakening momentum remains moderate, with insufficient declines in operating rates, leading to the concerns over the supply side continue to support the market-cotton prices are difficult to drop significantly. The persistent firmness of spot cotton basis has become the steadiest anchor for the current market.

However, long-term supply expectations are ample. As cotton planting area in Xinjiang is expected to increase steadily and weather conditions remain favorable, the market generally expects Xinjiang's cotton output for the 2025/26 season to exceed 7 million tons. The arrivals of new cotton is likely to gradually ease supply tightness. Meanwhile, market attention to the issuance of sliding-scale duty quotas has increased, though the industry generally expects that if quotas are released, they will likely be primarily for processing trade, with a relatively small issuance volume that would still have limited impact on improving supply.

Conclusion:

The current cotton market is in a volatile pattern, with bullish and bearish factors mutually restraining. The short-term direction hinges on the race between two key variables:

1. If Downstream Deterioration Accelerates:

Further decline in operating rates, continuous backlog of product inventories, and intensified cash flow pressure-cotton prices will face significantly enhanced downward pressure, likely resuming weak performance.

2. If Downstream Deterioration Remains Moderate:

Despite weakness, no collapse occurs, and rigid procurement by large mills continues-then the supporting logic of firm basis and short-term supply tightness remains valid. Before new cotton arrives on the market, cotton prices may still maintain range-bound.