Wavering Supply, Demand and Market Price
March 11, 2009 The cotton business has, as we all know, been through a tumultuous and trying year. Aside from the surprising upheaval in trading, the industry has most directly been affected by strong shifts in demand by the global textile industry. In turn, this shift in demand, both in terms of quantity consumed and the quality and varieties used, has directly resulted in many observers scratching their heads wondering what else can possibly be added to the mix.
So let’s identify some of the changes we saw take hold of the global industry in 2008, in terms of the major cotton producing and consuming regions of the world. To analyze the best actions for 2009, we must first recognize the changes on the playing field.
China
The Chinese textile industry in 2008 was buffeted by significant consolidation. This consolidation, forced by weakening demand in the export markets and stepped up competition from other suppliers, has resulted in significant swaths of the local industry being deferred indefinetly and an adjustment in the types of products typically produced by the remaining industry. Although China continues to have the leading textile industry in the world, its days as the unchallenged supplier of textiles to the world’s markets may be numbered.
At the same time, a growing domestic market has also affected the local textile industry and has helped to change the industry’s focus to include the tastes and preferences of the domestic consumers.
So, how have these changes been manifested? China has altered its buying patterns for cotton. Yes, there is still a domestic program to support local farmers, but the mix of cotton imported has changed. A look at U.S. exports shows it’s mostly comprised of varieties like Texas FiberMax (that is, varieties with a staple length of 1-1/8 inches or more and are not Pima).
What is so interesting here is, in the mix of cotton consumed by Chinese mills, the top end varieties, such as Pima, and the more moderate end of the business, traditional upland varieties, have lost market share to the FiberMax-type varieties. This may indicate an acceptance on the part of Chinese mills to pay for quality varieties at a fair price, which may trump poor quality varieties at a discounted price.
India
In 2008, the Indian textile industry suffered from overcapacity. There was talk that a consolidation in the local industry would inevitably have to take place if India is to remain competitive in textiles, but there was also talk that the government may offer a U.S.-styled bailout of the Indian textile industry in order to keep employment levels high. These conflicting signals continue to make an assessment of the Indian textile sector difficult to make.
But, despite these conflicting readings, it appears that the commodity side of the business continues to dominate Indian production. In the U.S. market, for example, as India rose to become a major supplier of textiles and apparel to the U.S., its average price offered in that market fell over the past five years. This occurred while the product mix shifted from typically higher cost, higher quality products such as shirts to lower cost commodity products such as jeans and woven pants.
In turn, while India has increased its ranking in the U.S. market by rising from a rank of 12th in 2002 to a rank of 7th largest supplier by 2007, the product mix changed from the predominate ranked product of last year with India gaining a significant share of the U.S. market in trousers (jeans and twill pants), while losing market share in woven shirts and sweaters – products that often require higher quality yarns.
Yet, demand for Indian textiles and apparel has fallen in the U.S. and EU, the major export markets for Indian producers. Indian mills are feeling the pinch.
United States
With the nation mired in a deep recession, U.S. textile and apparel consumption is down. Concurrently, with the bulk of the U.S. market fed by imports, poor conditions have resulted in sharply lowered levels of imports. Leading indicators suggest that the U.S. is in for a severe downturn, continuing to suggest little chance for a rebound in the health of the economy in the first few months of 2009.
According to the Conference Board’s Index of Leading Economic Indicators (ILEI), consumer confidence continues to fall. Looking ahead, the composite of ten leading indicators are down more than in the 2001 recession and almost as much as in the 1990/91 recession, providing yet more evidence that the current downturn is likely to be deeper than either of the last two. The current downturn is ultimately rivaling the 1981/82 contraction (one of the worst contractions since the Great Depression).
European Union
The EU is struggling, too. Long at the top-end of the global textile supply chain, even the vaunted spinners of Italy have succumbed to the price pressures of competitors. Technology, long an advantage for many producers in Europe, has now become its own commodity with state-of-the-art equipment commonly found throughout the world. Without the advantages of technology, mills in Europe have been shuttered across the continent. Many have sought refuge in Eastern Europe and North Africa and have taken advantage of preferential trade agreements to help blunt their competitors from around the world.
As though the difficulties of the EU textile industry weren’t enough, the domestic market has sharply contracted as the effects of the global financial crisis reach into the European economy. Apparel retail sales – a bellwether of economic conditions in Europe – have faltered as recession has tightened its grip on the spending habits of consumers.
Not surprisingly, consumer sentiment in Europe remains bearish, with consumer confidence falling to near-record lows.
The Rest of the World
Overcapacity has plagued the global textile industry for years, and 2008 was no exception. This problem of overcapacity manifested itself in recent years with sharp reductions in the industries of the U.S., EU and Japan – the developed countries. Now, however, it appears that developing countries will also face the brunt of declining demand for their products and hence reductions in the size of their overall industries.
But despite the difficult environment for manufacturers and exporters around the world, some suppliers have shown remarkable resiliency. For example, Vietnam, Bangladesh and Honduras are all enjoying an export boom of sorts, even as China and India struggle to maintain their footing in the global markets. Whereas U.S. imports of apparel from China and India declined by 2.5% and 1%, respectively, imports from Vietnam soared by 22%, Honduras rose by 11.2% and Bangladesh by 5%.
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