Cheng Sujing, Lead analyst of CCFGroup, presented her report of China cotton supply chain production and sales & substitution outlook.

The report mainly discusses the production, sales and substituation outlook for cotton industrial chain.

Overall, cotton industry chain is operating weakly, with finished goods inventory showing an upward trend and increasing pressure. The phenomenon of production cuts and shutdowns is expected to further increase, with a weak foundation for price increases being driven downstream. Profitability along the industry chain is poor, especially with inland textile enterprises experiencing significant losses, leading to more instances of production cuts, shutdowns, and transitions. Production capacity in Xinjiang continues to expand, squeezing inland cotton yarn capacity. From January to May, cotton yarn production increased while consumption decreased. Comprehensive cotton yarn inventories have noticeably decreased from their peak, with traders' inventories at a moderate level. There is anticipated demand for replenishing inventories in the future. Meanwhile, raw material inventories along the cotton chain remain low, providing a foundation for replenishing inventories in the industry chain. China domestic sales and export demand is mediocre, whereas import demand from overseas markets in Europe, U.S., and Japan has shown a significant recovery, especially in the U.S. market. Clothing wholesalers' inventories have decreased to reasonable levels, with further strengthening of inventory conditions expected in the future.

Regarding substitutes, the weakening of substitution factors in period has resulted in an increased impact of profit substitution. The profitability of major yarn varieties from last year to present has significantly deteriorated compared to previous years, especially for cotton yarn which has the worst profitability, followed by polyester-cotton yarn. While other varieties also show poor performance, they can still maintain positive cash flow. Profit-driven transitions to production of cotton yarn have increased among inland textile enterprises.