What happens to cotton yarn after fluctuating ZCE cotton futures?

ZCE cotton futures fluctuated greatly this week, hitting new high on Monday and then plunging on Wednesday and Thursday. And what happened to downstream market? 

Demand weakened during off season

Cotton yarn orders declined since early May, when sales appeared well, and spinners either saw inventory accumulated slightly or were fulfilling earlier orders. O/R of weaving mills declined significantly in Foshan, Guangdong province, transactions also decreased significantly in Nantong since mid-May, and supply of compact-spun combed yarn 60s increased. As weavers made procurements for rigid demand, cotton yarn sales in May were largely contributed by traders.

Cotton yarn prices failed to rise and discounts were offered

Conventional varieties rose by 1,000yuan/mt and sales also increased in early May, when cotton prices surged and sales grew, later it became difficult for cotton yarn to follow the rising trend (after a brief decline) of cotton prices, and some spinners even had to lower their offers. As suggested by chart below, the downstream textile market performed even worse, with cotton fabric prices falling to the same level as in April.

Profit deteriorated but no reduction in production yet

Cotton yarn profit declined further as yarn prices failed to increase after the rising cotton prices. As can be seen from chart below, mainland spinners now suffered a theoretical spot loss of carded yarn 32s at around 1,000yuan/mt, the lowest level since latter half of 2022, and the profit of one-month cotton inventory was also rather frustrating. Spinners haven't taken any steps to reduce or suspend production yet, as cotton yarn inventory remained low at present, but with inventory accumulating and profit getting no improvement during off season, a reduction in production is expected in Jun and Jul.

In conclusion, downstream demand for cotton yarn in May was better than same period of previous years, thanks to domestic consumption recovery and market participants being bullish on market outlook in next half of this year. Yet market demand will probably decline later, and cotton yarn prices are less likely to rise unless cotton prices surge again, but considering the great loss and low inventory of spinning mills, the probability of a significant decline in cotton and cotton yarn prices is low.