The traditional relationship between global cotton prices has changed in recent months. Chinese cotton prices are usually 15-20 cents/lb higher than the Kotruk A Index, but have become the lowest in the world since mid-August. Indian spot prices have traditionally been close to the ICE cotton futures December contract, but they have become the highest in the world since late June.
Lower cotton prices in China than in other regions may affect global cotton trade in the new year. China is the world’s largest importer of cotton and cotton yarn, and a sharp drop in domestic prices will curb import demand. Last year, Chinese ginners purchased seed cotton on a large scale at high prices. The transmission of prices to downstream was blocked, causing domestic commercial inventories to hit a record, thus lowering domestic cotton prices. Another factor is that the United States has banned cotton imports from Xinjiang, but since prices in China are lower than other markets, Chinese cotton stocks may decrease, while imports of cotton and cotton yarn may decline.
China imported 12.9 million bales of cotton in 2020/21. In the 2021/2022 season, China imported 7.8 million bales of cotton and is expected to import 9 million bales in the 2022/23 season. In 2022/23, U.S. cotton production is expected to decrease by 3.7 million bales year-on-year. If China reduces imports to the 2015/2016 level of 4.4 million bales, it may eliminate the tight export supply caused by lower U.S. production.
Affected by cotton prices at home and abroad, China’s yarn imports have also declined. In July 2022, China’s cotton yarn imports fell by 41% year-on-year, the lowest in ten years. Most of China’s imported yarn comes from Vietnam (accounting for 48% in 2021/22). The decline in China’s yarn import demand may lead to a decrease in Vietnam’s cotton import demand, offsetting the tight supply of US cotton exports.
Other issues on the demand side include quarantines, soaring energy costs in Europe, and the Federal Reserve continuing to raise interest rates. The United States, the European Union and China are the world’s largest cotton product consumer markets, and the above factors will affect terminal demand. Cotton prices have fluctuated violently recently, highlighting market uncertainty. In the future, the market will seek a new balance between export supply and downstream demand, and price fluctuations are likely to continue.