The month of September marked a significant turning point in the domestic cotton market, as prices surged by as much as 15%. The 328-level cotton index climbed from 18,002 yuan on September 1 to 20,644 yuan, reaching the second-highest level in history—only behind the peak during the "Cotton Crazy 96" era. During the same period, the global Cotlook index also skyrocketed, rising from 94.1 cents per pound to 108.5 cents per pound, reflecting a similar upward trend (see Exhibits 1 and 2). Although we had anticipated a price increase, the magnitude of the rise far exceeded our expectations.
Experts suggest that the sharp increase in cotton prices is driven by several key factors related to global supply and demand. Domestic production was affected by adverse weather conditions, which delayed harvesting by about two weeks and reduced the quality of the crop. Internationally, India temporarily suspended cotton exports, while Pakistan faced its own supply challenges. These events led the market to expect a tightening in global cotton supplies, prompting speculation and driving prices higher.
However, the market appears to have overlooked the positive developments in U.S. cotton planting, where output has increased by 19% this year. Additionally, China's cotton harvest is still ongoing, with a large volume yet to be picked, suggesting that supply may not be as constrained as perceived. This situation bears a striking resemblance to the 2008 oil price surge, when crude oil rose from $100 to $147 per barrel. Cotton, now increasingly viewed as a financial asset, has become a target for speculative capital.
Historically, cotton prices have been volatile due to the behavior of processing, circulation, and spinning enterprises, which constantly seek low-cost cotton to maximize profits. This cycle of rapid stock fluctuations has led to sharp price swings, such as the 2003–04 period, when prices soared from 12,000 to 18,000 yuan and then dropped back to 10,000 within six months. This volatility resulted in massive losses for newly established cotton storage companies.
This year, the speculative fund involvement in cotton markets remains strong, with additional inflows further fueling the price surge. These funds have largely ignored national policies and instead focused on profiting through extensive spot market purchases in both Chinese and U.S. cotton futures markets.
The growing global demand for cotton products is another major driver. From January to August, textile and apparel exports reached $125.2 billion, up 23.8% year-on-year. Domestic wholesale and retail sales of textiles and apparel also rose by 23.8% in the first seven months, nearly reaching pre-crisis levels. This strong demand is a key factor behind the current price rally.
Additionally, the broader rise in global agricultural commodity prices has contributed to the upward pressure on cotton. With one-third of global cotton imports coming from China, the country's domestic price increases are closely tied to international trends. While high cotton prices may seem beneficial in the short term, they could lead to downstream impacts, such as higher clothing costs, which will eventually be passed on to consumers. In a globally recovering economy, the textile industry faces mounting pressure.
If cotton prices were to fall, it might trigger a repeat of the 2004 crisis, when prices collapsed and caused widespread losses. Until the market stabilizes, cotton spinning enterprises are likely to see declining profitability. Given the historical context, a flat or lower price seems unlikely, as both the government and businesses have long sought such an outcome.
Looking ahead, the difficulty of further price increases is expected to grow, given cotton’s growing financial characteristics and the influence of capital flows. As highlighted in our weekly reports, this trend is a key concern for raw material pricing this year.
With the global economic crisis still ongoing and cotton supply continuing to grow rapidly, we can only say that current prices are at a historically high level. New cotton products are expected to hit the market in mid-to-late October, potentially adding more uncertainty.
**Investment Insight:**
We have consistently warned about the risks facing textile and apparel producers, particularly those reliant on exports, as rising costs and currency appreciation threaten their profit margins. Despite this, we maintain an "overweight" rating on the sector, mainly due to the resilience of high-quality retailers who can absorb cost pressures through brand strength, product design, and effective marketing.
For cotton producers like Nongnong, Xinsai, and Dunhuang, the sharp rise in seed cotton prices has increased their input costs, creating uncertainty around future earnings. However, these companies present potential trading opportunities.
Cotton price movements directly affect the cost of viscose raw materials, such as cotton linters. As these costs rise, viscose prices are also under pressure. While price increases may have limited impact on overall business efficiency, companies like Shandong Hailong, Macao Yang Technology, Sanyou Chemical (which has received approval for viscose staple fiber capacity expansion), and Xinxiang Chemical Fiber are well-positioned to benefit from the current environment. Additionally, the adhesive sector offers promising investment prospects.
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