Profitability Depends on Partners Working Together

The global economy is back on a growth path following the 2009 financial and economic crisis. Global production and trade are expected to increase in 2010 by 4.8 percent and 11.4 percent, respectively, and the outlook for 2011 is promising, with global GDP and trade projected to expand by 4.2 percent and 7 percent, respectively. In the global textile industry the recovery was also visible. According to ITMF’s State of Trade Report (STR), yarn and fabric production grew strongly after the first quarter of 2009, reaching new records in the 2nd quarter of 2010.

Despite this positive economic situation and outlook for 2011 the global textile industry was suddenly faced with a challenge hardly anybody in the industry had anticipated in its scale and scope: soaring raw cotton prices. There are many reasons for the surge and volatility in cotton prices. Supply and demand were out of balance and low cotton prices drove farmers to plant other crops. Prices also jumped because of speculators in cotton futures markets. Expansionary monetary policy with low interest rates and a weakening U.S. dollar are reasons why the prices for commodities have been rising strongly across the board.

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The surge in cotton prices poses a huge challenge to the entire cotton and textile value chain. Many textile manufacturers are unwilling and unable to absorb rising cotton prices. Looking at the yarn index, it can be seen that spinners are able to pass on higher cotton prices, but that becomes more difficult further downstream.

Textile manufacturers often have long-standing contracts with customers in the retail market that are not adaptable. As a result, they often have a difficult choice: fulfill the contract and lose money or default on the contract and lose a customer. Hopefully, partners in the textile supply chain will work together more closely understanding each other’s challenges and finding solutions that allow all companies to remain profitable.

In cases where there is no cooperation, textile manufacturers are inclined to stop production rather than sell for small margins or even losses. As a result, the retailers will struggle to fill their shelves and are more inclined to accept higher prices and to pass them on partially to consumers.

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Dark clouds and silver linings

The global textile industry is undergoing a very challenging time. Although the global economy has recovered in principle, risks remain in the U.S. economy as well as some European countries, like Greece and Ireland, which is threatening the stability of the Euro zone. But despite these risks, there are fundamental aspects that are promising a bright future for the textile industry: 1) a growing world population will automatically increase global demand for textiles; 2) a growing global GDP will fuel demand in general and for textiles in particular; 3) per capita consumption of textiles in many developing countries will continue growing and 4) new applications for textiles (technical textiles) will create new demand. Therefore the outlook for 2011 and beyond is a positive one.

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