Firm cotton prices amid a bewildered downstream market

Starting from June 24, Zhengzhou cotton futures market began a strong rally. By June 27, longs had accumulated nearly 70,000 additional open interests, driving Zhengzhou cotton to be firm. On June 30, the market surged higher before pulling back as some longs took profits; after a brief consolidation, ZCE cotton continued its steady upward shift. By the close on July 14, Zhengzhou cotton had fully recouped all losses since February, with the shadow of April's tariff adjustments seemingly lifted entirely. This robust recovery-from the year's low of 12,315yuan/mt in early April-stems from a confluence of factors. Alongside macro tailwinds from Sino-U.S. negotiations in May-June and recent "anti-involution" policy support, persistent resilience in downstream rigid demand and high consumption tied to strong capacity have kept spot cotton basis firmly anchored throughout the period.

Yet, as Zhengzhou cotton has advanced recently, the divergence between upstream and downstream sectors has widened. Profits at Xinjiang spinning mills and cash flow at inland mills have deteriorated rapidly. With downstream weakness failing to support yarn prices tracking the futures rally-compounded by slow absorption of finished goods-downstream mills are growing increasingly perplexed by the futures market's strength amid their own struggles.

Despite the downstream sector's deterioration-with inland mills having steadily cut operating rates since June-Xinjiang mills have maintained robust production levels. Their rigid demand for cotton from Xinjiang warehouses remains resilient. This resilience has kept the situation in check: while spot cotton basis failed to extend its strong upward trajectory since June (due to weaker downstream absorption capacity), low-basis cotton in Xinjiang warehouses has continued to be drawn down. Inventories of low-basis cotton in Xinjiang fell steadily through June, with even previously sluggish Kashgar cotton seeing rapid depletion. Between June and mid-July, availability of Kashgar grade-3129 cotton priced at CF09+900–1,100yuan/mt dwindled sharply. Supported by cumulative resilient demand, the basis for Xinjiang cotton showed signs of a renewed upward shift by mid-July.

Under the high operating rates at Xinjiang mills, the currently firm basis of spot cotton in Xinjiang warehouses continues to provide strong support to cotton prices. In the short term, it remains a race between downstream rigid demand for cotton and downstream profits, as well as between Xinjiang mills and the warehouse receipt pressure in inland regions. Thus, the downside room for Zhengzhou cotton may remain limited for the time being. However, with expectations of a bumper new crop and the approaching arrival of new cotton, mid-term price pressures are likely to build gradually.