China cotton market capped by state auctions, while potential production cuts provide support

The recent domestic cotton market continues to see long-short wrestling. On the bearish side, the national reserve cotton auction policy has brought fresh supply pressure, while on the demand side, the downstream textile sector is in the off-season. However, persistent extreme high temperatures in Xinjiang's cotton production areas may continue to affect the growth progress of new-crop cotton.

The reserve cotton auction was officially launched on July 20, with a total of over 40,000 tonnes offered in the first week, a 100% clearance rate in daily bidding, and an average transaction price remaining around Yuan 17,300/tonne. As these auctions proceed, the premiums in transactions have gradually narrowed, which has also cooled market concerns over tight spot cotton supply. Based on estimates, the state reserve is expected to release a cumulative total of 420,000 tonnes by the end of September, easing supply tightness before the new cotton hits the market.

In addition, textile market is currently in the consumption off-season. Textile mills in Jiangsu, Zhejiang, Shandong and other areas have successively reduced operating rates, with the average operating rate falling back to around 72%. Pure cotton yarn sales are sluggish, with quotations stable to weak, while low-priced chemical fiber raw materials further affect the pace of cotton yarn shipments. Overseas, Vietnam's textile and garment exports have recovered month-on-month for two consecutive months, indicating signs of gradual recovery in overseas end-market consumption, and domestic expectations for the clothing season restocking in August-September are gradually picking up.

However, bullish support remains equally evident. The current period is a critical stage for cotton boll-setting, which is crucial for determining annual yields. As of the timing of this writing, major production areas such as Yuli and Qiemo in southern Xinjiang have seen highest temperatures exceeding 40°C for several consecutive days, with local extremes reaching above 42°C, far exceeding the optimal growth temperature range of 28-30°C for cotton.

The cotton growth conditions between southern and northern Xinjiang show clear divergence. In southern Xinjiang, cotton producing areas with adequate irrigation conditions are generally performing slightly better than last year. In northern Xinjiang, on the other hand, the low temperatures and excessive rainfall in May had already led to insufficient accumulated temperature. Coupled with the current heatwave, cotton yields may be affected.

Due to the high-temperature drought, the Ministry of Agriculture and Rural Affairs of China has lowered its new-season cotton yield estimate to 147 kg/mu, with total production revised down to 6.34 million tonnes. However, the final extent of the production reduction still depends on temperature conditions and irrigation water supply in early August.

At the same time, national commercial cotton inventories have continued to decline, falling to around 2.59 million tonnes, of which inventories in Xinjiang have dropped to 1.44 million tonnes, down 6.36% year-on-year. Domestic port foreign cotton inventories remain at around 600,000 tonnes, with a relatively slow overall digestion pace. Due to the release of reserve cotton, some buyers have turned to state reserve cotton. Downstream spinning mills mostly maintain a hand-to-mouth purchasing model, with little willingness to build large inventories, while mainstream weaving mills maintain yarn inventory days at around 20-30 days.

In summary, the expectation of cotton production reduction due to high temperatures in Xinjiang continues to provide support for cotton prices, while the sustained release of reserve cotton caps upside gains. With weak off-season demand, long-short dynamics are intensifying, and the market lacks clear directional guidance.

In the near term, the cotton is expected to continue trading in a broad range of Yuan 15,700-16,200/tonne in China's Zhengzhou. Going forward, market attention should remain on daily reserve cotton offerings and transaction price changes, temperature variations in Xinjiang's cotton producing area in early August, and the recovery of downstream seasonal orders in August.