Policy Dividend Affects The Macro Environment Of Domestic Cotton Market

In 2024, the GDP will grow by 5% year on year, achieving the target set at the beginning of the year; Consumption, investment and export worked together. A package of incremental policies reversed the downward trend of the economy and boosted market confidence. The year 2025 is the end of the 14th Five Year Plan, and it is of great significance to keep the economy running smoothly. The country has introduced a number of economic stimulus policies, and the Central Economic Work Conference also clearly pointed out that domestic demand should be expanded in all directions in 2025. With the introduction and implementation of relevant policies and measures, China's domestic demand market consumption is expected to gradually repair. On January 22, the Central Financial Office, the China Securities Regulatory Commission, the Ministry of Finance, the Ministry of Human Resources and Social Security, the People's Bank of China and the State Administration of Financial Supervision jointly issued the Implementation Plan on Promoting the Entry of Medium and Long term Funds into the Market, which also created a positive atmosphere for the market.

　 1. The gap between domestic cotton production and demand narrowed in 2024/25

According to the January data of the National Cotton Market Monitoring System, the domestic cotton output in 2024/25 will be 6.676 million tons, an increase of 773000 tons year on year, 376000 tons month on month, the second highest point in nearly five years (6.719 million tons in 2022/23 is the highest record in nearly five years); The cotton consumption was 8 million tons, an increase of 100000 tons year on year, and the month on month ratio was the same; The gap between production and demand decreased from 1.997 million tons last year to 1.324 million tons.

2. Domestic cotton supply situation

The expectation of high yield and high quality of new cotton is fulfilled, and the impact on cotton price is diminishing marginally. In January, the domestic cotton public inspection entered the late stage, and the daily public inspection volume slowed down to 20000 to 30000 tons, which is expected to further reduce after the Spring Festival. According to the data of China Fiber Quality Monitoring Center, as of January 20, the national cotton inspection volume was 6.281 million tons, with a year-on-year increase of 958000 tons. According to the data of the State Administration of Market Supervision and Administration, the cotton quality in Xinjiang will reach the best level in nearly six years in 2024. Compared with 2019, the length index will increase by 0.4 mm, the strength index will increase by 49.4 percentage points, the maturity and fineness (the proportion of micronaire value A+B) will increase by 9.5 percentage points, and the spinnability of cotton will be significantly improved. Unilaterally, since the launch of new cotton this year, the expectation of high yield has gradually strengthened and increased the pressure on the fundamentals. The market has fully responded to this, and the price of Zheng Mian futures has dropped by more than 1000 yuan from 14755 yuan/ton in early October 2024. In the near future, with the reality of the high yield expectation, the marginal impact on cotton prices has decreased, and the trend of Zheng Mian has stabilized.

　 3. Domestic textile and clothing situation

Domestic demand continues to be weak, and textile enterprises are short of orders. Before the Spring Festival, the number of textile enterprises' orders was generally lower than expected. A textile enterprise in Hebei said that by the first ten days of January 2025, the orders had been basically completed before the year. As the number of orders received in the first quarter was very limited, it was planned to control labor costs by extending the Spring Festival holiday and reducing the startup rate. According to the data from the National Cotton Market Monitoring System, the operating rate of textile enterprises dropped 8.5 percentage points to 67.5% at the beginning of January, which has declined for three consecutive months. On the terminal market, the retail sales of clothing, shoes, hats, needles and textiles in December continued the negative year-on-year growth trend, with a year-on-year decrease of 0.3 percentage points. On the whole, except that the year-on-year growth rate of domestic clothing retail sales reached 8% in October 2024, it has shown a negative growth trend since June 2024, indicating that the problem of insufficient domestic demand is still prominent.

China's textile and clothing exports ended in December more than expected, and "striving for exports" is an important support. The growth of China's textile and clothing exports will significantly expand by the end of 2024 under the combined effect of holiday consumption and the "rush for exports" to the United States. According to the data of the General Administration of Customs, in December, the export of textile and clothing reached US $28.07 billion, up 11.4% year on year and 11.5% month on month; From January to December, the cumulative export was USD 301.1 billion, up 2.8% year on year. Later, as the holiday consumption atmosphere gradually dissipates and the overseas market makes some progress in replenishing the stock in advance, China's "rush to export" orders may decrease accordingly. Due to the strong uncertainty of the US tariff increase policy, it is expected that tariff barriers will inevitably drag down China's textile and clothing export market in the future. The pace and extent of tariff increase will determine the impact on China's textile and clothing exports.

Domestic textile consumption was downgraded, and cotton blending ratio of some enterprises was reduced. In recent years, the textile market has a prominent feature of "low peak season", and the competition for homogeneous conventional yarn products in the market is fierce. Enterprises are facing the pressure of price war and seeking differentiated production routes to maintain their operations. According to the survey, a domestic enterprise that produced pure cotton products a few years ago recently adjusted its product structure by reducing the cotton blending ratio. After transforming to produce blended products, its profit margin was about 500 yuan/ton higher than that when it produced pure cotton products.

The inventory survey report of China's cotton industry shows that at the beginning of January 2025, 11.8% of enterprises intend to reduce the cotton blending ratio, an increase of 3.3 percentage points year on year, 7.3 percentage points higher than the average level of the same period in recent five years. The analysis may be related to the following reasons: First, under the background of economic downturn, the overall domestic consumption situation shows a trend of shrinking and degradation; Second, enterprises and consumers generally adhere to the principle of "price first", and the substitution of low-cost chemical fiber raw materials for cotton has increased; Third, because the spinning cost of Xinjiang is about 2000 yuan/ton lower than that of the mainland, it is difficult for the mainland textile enterprises to compete with it. By reducing the cotton blending ratio and other ways, the product structure is adjusted to avoid the impact of low cost from Xinjiang cotton yarn.

　 Main conclusions

At present, the domestic new cotton production increase is expected to be realized, and the impact on the recent cotton price is marginal weakened. The downward trend of consumption in the downstream market has not improved. The support of the domestic demand expansion policy remains to be further observed. The external demand may decline after the stage of activity. The fundamentals of loose supply and demand are not enough to support cotton prices. In the short term, it is expected that changes in the macro environment will have a stronger role in boosting cotton prices, and the probability of cotton prices being stronger will increase.

First, from the current situation, Trump's tariff speech has weakened its deterrent on cotton prices. The market expects that the 10% tariff increase will be more moderate than the 60% range previously stated. Exporters believe that it is still within the affordable range, which partially alleviates market tension.

Second, from the domestic situation, historical data show that the first quarter is often the key node for China to achieve a good start to the whole year's economy, and the market hopes that a new round of domestic policies will be introduced and implemented intensively after the festival, or provide a certain upward momentum for domestic cotton prices.