China Galaxy Securities has released a research report indicating that the current upward cycle in raw material prices presents a clear opportunity for profit recovery among leading textile yarn enterprises. On the wool front, supply contraction is coinciding with a rebound in demand. Cotton prices are fluctuating upwards, supported by a favorable inventory-to-consumption ratio, while rising crude oil prices are driving up costs across the chemical fiber supply chain. Companies employing a "cost-plus" pricing model and maintaining stable procurement strategies are well-positioned to enhance their gross margins through inventory gains and product price increases, thereby realizing earnings potential. The report suggests focusing on leading wool spinning company Zhejiang Xinao Textiles Inc. (603889.SH), color spinning specialist Bairun Oriental (601339.SH), and nylon industry leader Taihua New Materials (603055.SH). The key viewpoints from China Galaxy Securities are outlined below.
A restructuring of supply and demand dynamics is occurring in the core upstream raw material markets for the textile and apparel supply chain. Since 2025, Australian wool supply has entered a contraction phase, while recovering downstream apparel demand is boosting inventory replenishment, pushing wool prices higher. In the cotton sector, global production and consumption remain balanced, with the inventory-to-consumption ratio declining to a mid-to-low level compared to the past decade, providing underlying price support. Steady growth in domestic apparel retail is driving a recovery in cotton consumption, leading to a fluctuating but upward trend in domestic cotton prices. For the chemical fiber chain, cyclical changes in crude oil prices are dictating the industry's pricing logic. Since the start of 2026, rising crude oil prices have driven the overall cost base higher for the chemical fiber industry. A recovery in polyester chain margins and the potential for nylon prices to catch up are converging to establish a clear path for a sector recovery.
As the core cost component of the textile and apparel industry, fluctuations in upstream raw material prices directly impact cost transmission efficiency and corporate profitability across the supply chain. Upstream textile enterprises typically utilize a "cost-plus" pricing model and steady procurement strategies. When demand is relatively stable, rising raw material costs lead to higher product prices. Companies holding low-cost inventory can experience an improvement in profit margins.
Supply constraints combined with recovering demand have ushered wool into a new cycle of rising prices. The wool market exhibits periodic price fluctuations, having entered a new upward cycle starting from the July 2025 wool season. Prices rose from 1,208 Australian cents per kilogram to 1,716 Australian cents per kilogram by February 27, 2026, a 45% increase compared to the same period in 2025. According to the Australian Wool Production Forecasting Committee's December 2025 report, total Australian greasy wool production for the 2025/26 season is forecast to decrease by 12.6% year-on-year to 245,000 tonnes, a further reduction of 35,000 tonnes from the August forecast of 280,000 tonnes. This is based on an expected significant 10.3% reduction in the number of sheep shorn to 56.5 million head, coupled with a 2.7% decline in the average fleece weight per sheep to 4.33 kilograms. The current wool auction pass-in rate remains low at around 5%, indicating that demand has entered a phase of steady expansion.
Global cotton production and consumption continue a stable trend, with the domestic Chinese cotton market entering a phase of price stabilization. USDA data indicates that global cotton production and consumption have been balanced in recent years. For the 2025/26 marketing year, production is forecast at 26.00 million tonnes, a marginal increase of only 0.81% year-on-year, while consumption is expected to remain largely stable at 25.89 million tonnes, almost unchanged from the previous year. Regarding inventory levels, the inventory-to-consumption ratio for the 2024/25 season is projected at 62%, sitting at a mid-to-low level for the past decade and showing a marginal downtrend. The ratio is expected to remain around 62% for the 2025/26 season. Expectations of reduced cotton production in Xinjiang, China, combined with downstream willingness to replenish inventories, are expected to effectively support domestic cotton prices.
Supported by rising crude oil costs, chemical fiber raw material prices are trending upwards. Driven by the increase in Brent crude oil from around $61 per barrel at the start of 2026 to approximately $84 per barrel, the chemical fiber supply chain has established a logic where rising cost bases and profit recovery reinforce each other. In the polyester segment, the processing spread for polyester filament POY relative to its raw materials, PTA and MEG, has steadily recovered from a low of 1,000-1,100 yuan per tonne in early July 2025 to a range of 1,300-1,500 yuan per tonne. In the nylon segment, prices have stabilized with room for further catch-up. While the price of upstream caprolactum has rebounded 24.7% from its low in early November 2025, nylon prices have increased by only 9.7% over the same period, suggesting that the potential for price increases has not been fully realized. The current processing spread between nylon and caprolactum has slowly recovered from a low of around 1,600 yuan per tonne in February 2026 to approximately 1,740 yuan per tonne. However, this remains significantly below the historical average spread of around 3,030 yuan per tonne. As downstream weaving operations steadily resume after the holiday period and stocking demand gradually recovers, nylon is expected to achieve spread recovery and a rising price trend, driven persistently by stronger costs. This upward trend in raw materials will drive profit recovery across the chemical fiber chain.
Fluctuations in upstream raw material prices directly impact corporate product profitability. A rising wool price cycle typically corresponds to an expansion of gross margins for worsted wool spinning companies. Taking Zhejiang Xinao Textiles Inc. as an example, the company predominantly uses a cost-plus pricing model for its worsted yarn products. When wool prices are in an upward trend or remain high, the price of its wool top products increases accordingly, leading to higher gross margins and an amplified markup per unit of product. Cotton is typically the most significant cost item for yarn companies, accounting for approximately 70% of raw material costs. The gross margins of the yarn businesses of leading companies like Huafu Fashion and Bairun Oriental also show a positive correlation with cotton prices; margins tend to perform better during periods of rising or high cotton prices. Similarly, the gross margin of the nylon filament business of industry leader Taihua New Materials increases as the spread between nylon and caprolactum widens. Leading upstream textile manufacturers often manage cost volatility through periodic inventory stocking, while their final selling prices are anchored to current market rates. When raw material prices rise, the benefit of holding low-cost inventory is realized, enhancing the company's profit level.
Risk warnings include volatility in upstream raw material prices; downstream demand falling short of expectations; and changes in international trade policies.
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