How much impact does the epidemic in Xinjiang have on cotton yarn market?

Covid-19 epidemic has appeared in Xinjiang since August. Some cotton yarn mills suspended production or implemented the enclosed management, but had little influence on the overall market. Epidemic condition became worse during National Day and confirmed cases increased in many places of Xinjiang, making control measures be upgraded. According to CCFGroup, cotton yarn mills in places including Aksu, Korla and Shihezi stopped production or implemented enclosed management. The operating rate in Xinjiang slipped greatly and cotton yarn production declined obviously. Besides, further reduction of production was expected due to some reasons such as the increasing difficulty of cotton procurement. So how much impact does the epidemic in Xinjiang have on cotton yarn market?

1.The proportion of Xinjiang cotton yarn production is relatively large, which leads to the reduction of domestic cotton yarn supply

The spinning capacity in Xinjiang has exceeded 20 million spindles. As the second largest production base in China, the capacity accounts for around 15% of national total. In 2021, cotton yarn production in Xinjiang accounted for more than 25% of the total cotton yarn production in China, which shows Xinjiang cotton yarn’s position is absolutely pivotal in China. Now on the one hand, cotton yarn mills in Xinjiang reduced and suspended production amid the influence by epidemic, making production decline obviously. On the other hand, domestic cotton yarn supply from Xinjiang will slip apparently as cotton yarn transported out of Xinjiang is blocked. The reduction of cotton yarn supply in consumption regions will be beneficial for domestic cotton yarn consumption to some extent. However, market demand shrank after National Day and downstream orders lacked, making cotton yarn prices still hard to rise with great resistance.

2.The cost of cotton yarn mills rises as domestic cotton supply is tight and prices are firm

Cotton stocks in cotton yarn mills were continuously at low level as market commonly expected the falling of cotton prices, and the averaged inventory was less than 20 days till now. Though prices of cotton futures continued to drop, actual spot cotton prices were very firm mainly as unsold cottons were concentrated and domestic cottons were few. Now cotton transported out of Xinjiang was harder due to the upgrading of epidemic control in Xinjiang. At present, domestic cotton inventory of industry and commerce could only be used for more than one month, making spot cotton prices easy to rise and hard to drop in short term. Cotton yarn mills may face  cotton supply shortage and the rise of cost. Cotton yarn prices are very hard to rise with great resistance as downstream demand lacked, and the cotton yarn mills may suffer losses again.

To sum up, downstream demand for cotton yarn is weak, and it is almost certain that demand will decline in October compared with September. The overall supply of cotton yarn reduces due to the epidemic upgrading in Xinjiang, giving some support for cotton yarn prices. Besides, domestic mills face the pressure of tight spot cotton supply and the rising of prices. When epidemic control will release in Xinjiang is uncertain. Even if cotton prices rise, it is not very likely for traders to buy a large number of cottons and cotton yarns as traders and mills are afraid of the falling back of prices due to the increase of supply after lift lockdown in Xinjiang. Moreover, there is much current cotton yarn inventory, so the rising of cotton yarn price is with great resistance. If cotton yarn prices rise, the rise range is not expected to pass over cotton’s, making profit of cotton yarn mills narrow and even turn to losses. If epidemic control time is too long, domestic cotton yarn mills have to reduce, suspend or transfer the production.