After the May Day holiday, China's cotton market reversed its pre-holiday rally. The Zhengzhou Commodity Exchange (ZCE) cotton futures main contract briefly tested the 17,000 yuan/ton mark but quickly retreated, falling over 600 points from its peak as of May 11. Long positions unwound significantly as market focus shifted from 'tight supply' to 'weak demand'—a shift driven by accumulating fundamental contradictions rather than any single event.
Spot Inventories Low, Demand Tepid
On the supply side, domestic commercial cotton inventories are at year-to-date lows. High-quality Xinjiang cotton (double-29 grade, trash content below 3%) is particularly scarce, with basis firmly at 1,200 yuan/ton. This low-inventory environment should normally provide strong price support, but spot trading remains sluggish. Textile mills are strictly following a hand-to-mouth procurement strategy, covering only daily needs and showing no appetite for bulk stockpiling.
The divergence between low inventories and weak trading reflects deep-seated industry pessimism. Pre-holiday peak-season stocks have been largely consumed, while off-season expectations discourage new replenishment. With textile mills' profit margins already thin, any uptick in raw material prices quickly erodes processing profits, further dampening buying interest. The spot market lacks any upward catalyst and merely follows the futures market downward.
Textile Off-Season Takes Full Effect
May marks the official end of the 'golden March-April' peak season for textiles. Terminal orders are weakening, becoming the core bearish factor for cotton prices. Structurally, the market shows clear divergence: high-end 40S compact and combed cotton yarn still have orders extending to July-August, keeping mills running steadily on existing contracts. However, regular-count cotton yarn varieties face order shortfalls, with inventories slowly accumulating. Mills have cut prices by 100-200 yuan/ton, and bargaining room is expanding.
The grey fabric market faces even greater pressure. Circular knitting machine utilization in key areas like Foshan has dropped to 40%, significantly below peak-season levels. Weak demand from apparel and home textiles has led to insufficient new orders, while old orders are winding down. The negative feedback loop is clear: weak end-demand → lower weaving utilization → reduced cotton yarn procurement → softer cotton demand → further price declines.
Multiple Uncertainties Amplify Volatility
Beyond the weak fundamentals, macroeconomic and policy uncertainties are stoking market volatility. President Trump's upcoming visit to China is expected to stir sentiment across commodity markets, with cotton likely to swing with macro sentiment in the near term. More concerning for the market is the persistent expectation of state reserve cotton releases, which acts as a major overhang on prices.
In an off-season environment, actual reserve releases would increase supply and exacerbate oversupply concerns. Combined with elevated valuations after the pre-holiday rally, risk aversion has driven long positions to exit, accelerating the correction. The ZCE cotton futures are expected to continue a weak, bottom-seeking trend, with a core trading range of 16,000-16,800 yuan/ton and strong resistance above.
Mid-to-Long Term Support Remains Intact
Despite the bearish short-term outlook, the medium-to-long-term support structure remains solid. Domestic commercial cotton inventories are genuinely low; Xinjiang's planted area has been reduced, with industry estimates suggesting a 3-5% year-on-year output decline; and import supplements are limited. The annual supply-demand gap for domestic cotton persists.
This suggests the current correction is more about 'squeezing out froth' from overvalued prices and excessive optimism, rather than a fundamental reversal. As the second-half peak textile season approaches, terminal demand is expected to recover, offering valuation repair potential for cotton prices after the correction. For industry players, the focus should be on using futures tools to manage price risks rather than chasing trends blindly.