Cotton Prices: Short-Term Pressure vs Long-Term Support Amid Supply Gap and Seasonal Weakness

After the May Day holiday, China's domestic cotton market experienced a brief surge followed by a sustained decline. The main Zhengzhou cotton futures contract tested the 17,000 yuan/ton mark but failed to break through effectively. By the close on May 11, it had fallen over 600 points from its peak. Market sentiment shifted from optimism to caution, with trading activity notably contracting.

Background

The core contradiction in the current cotton market lies in the tug-of-war between short-term weak demand and medium- to long-term tight supply. On the spot side, commercial cotton inventories continue to deplete, reaching seasonal lows. High-quality Xinjiang cotton (double 29 grade, impurity below 3%) is particularly scarce, with basis firmly maintained at 1,200 yuan/ton, providing medium-term price support. However, spot prices are following futures downward, and end-user purchases have not followed, resulting in thin trading. Downstream textile mills are adhering to a 'buy-as-needed' approach, only maintaining routine replenishment, with little appetite for large-scale stockpiling. The underlying reason is that the textile industry has officially exited the 'golden March-April' peak season and entered the seasonal demand slack period, with weak end-user orders becoming the core bearish factor.

Industry Impact

Structural divergence within the textile industry is intensifying. High-end cotton yarns, such as 40S high-compact and combed compact varieties, maintain relatively stable orders, with scheduling extending to July-August. Mills are mainly executing existing orders, keeping operations smooth. However, regular-count cotton yarn varieties are seeing order follow-through weakening, with inventory gradually accumulating. Price divergence is evident: high-end 40S yarn prices remain stable due to firm order support, while most regular varieties have seen factory price cuts of 100-200 yuan/ton due to falling futures and weak demand, widening negotiation margins.

The gray fabric market is experiencing an even sharper downturn. Weak end-product demand has transmitted to the weaving sector, with operating rates declining. In core weaving regions like Foshan, large circular knitting machine utilization has fallen to 40%, sharply down from peak season levels. New orders are insufficient, and old orders are winding down, creating a 'gap period' for the industry. Weak consumption in apparel and home textiles is increasing destocking pressure on downstream textile companies, further contracting raw material purchases and forming a negative feedback loop: futures fall → spot follows → end-users wait → demand weakens further.

Beyond the weak fundamental supply-demand balance, multiple uncertainties are amplifying futures volatility. News of US President Donald Trump's upcoming visit to China is roiling overall commodity market sentiment, with the cotton sector likely to fluctuate with macro sentiment in the short term. Meanwhile, persistent market rumors of reserve cotton release are adding to bearish pressure. Against the backdrop of weak seasonal demand, this expectation exacerbates concerns about supply loosening. Combined with elevated valuations after the earlier price surge, risk aversion is rising, prompting long positions to liquidate and accelerating the short-term correction.

Practical Advice

For Buyers - Short-term cotton prices are likely to oscillate weakly in the 16,000-16,800 yuan/ton range; purchase on demand and avoid large-scale stockpiling during the initial correction. - Monitor Xinjiang's new season production expectations; if the 3%-5% production cut materializes, the supply-demand gap will support prices in H2, making phased accumulation at lower levels advisable. - High-quality double 29 grade cotton is scarce with strong bargaining power; lock in supply early to avoid being forced to chase prices when the peak season arrives.

For Foreign Trade Companies - With significant domestic-international price spreads, use futures hedging to lock in raw material costs and mitigate price volatility risks. - Monitor macro events' short-term impact on commodity sentiment; reduce exposure during Trump's visit and re-enter after sentiment stabilizes. - Competitors in Southeast Asia may have lower cotton procurement costs; differentiate through products like high-end cotton yarn to maintain order stability and avoid price wars on regular varieties.