Struggling commodities are finally seeing some relief, thanks to firmer global growth, a stabilizing US dollar, and supply-side weather disruptions. Cotton has been a leader in this catch-up. This ‘fabric of our lives’ plays a crucial role across clothing, fast fashion, and retail sectors and stands at the center of the ESG debate due to its high water and labor intensity, as well as its biodegradability benefits compared to oil-based fibers that dominate the clothing industry. Cotton prices are being driven by drought and fires in Texas, the largest producer in the biggest exporting country. Moreover, there’s a tight correlation with rising oil prices, which drive the cost of competing polyester (refer to the chart). This correlation makes cotton an interesting proxy for oil prices.
SUPPLY
India and China dominate the world’s raw cotton production, accounting for 47% of the total, but most of their production is used locally. The US is the largest raw cotton exporter, contributing 29% of the total, which influences the traded market significantly. A quarter of this export comes from Texas. Additionally, the US is the biggest importer of finished cotton goods. Brazil ranks as the No. 2 exporter, at 26%, where cotton is often grown as a rotation crop with soybeans. Raw cotton is then milled in countries like Bangladesh, Vietnam, and China. The global supply has been growing at approximately 2.5% per year, led by new growing areas in the Indian subcontinent and China, and higher yields facilitated by GMO seeds, despite rising water and labour issues.
DEMAND
Synthetic oil-based fibers, like polyester, dominate the global clothing market with a share of 70% and rising, making their relative price a key driver for cotton demand. Cotton maintains an average price premium of approximately $0.50/lb. Cotton dominates the natural fibers market, with 80% used for clothing, primarily denim. The remainder is mainly for household items like sheets and towels. Thus, consumer spending, especially on fast fashion, is a major demand driver. With cotton prices and sustainability issues, retailers such as Inditex (ITX.MC), H&M (HM-B.ST), the pending IPO Shein, and clothing stocks like GAP (GPS) and Levi Strauss (LEVI) face significant challenges.
Ben Laidler, eToro’s Global Market Strategist
