Consolidation Is Coming to the Textile Industry
February 22, 2012 The year 2010 brought a big sigh of relief to all stakeholders in the global textile value chain. After the global economy contracted in 2009 for the first time since the Great Depression, there were concerns that the world would fall into persistent economic depression.
The global economy escaped such a fate thanks to two main factors: emerging economies around the world continued to grow, and the policy responses around the world were expansionary. Fiscal stimuli in places such as the United States, Europe and China, as well as the loose monetary policies of major central banks, created sufficient demand and liquidity to prevent a global depression. As a consequence, global production and trade in 2010 increased 5.1% and 12.8%, respectively.
In 2010 and 2011, the global economy – and with it, the global textile industry – was faced with never-before-seen developments. Cotton prices soared in a very short period of time, rising from 80 cents/lb to a peak of $2.30/lb in March 2011 – an increase of approximately 190% – before dropping again to around $1/lb in December 2011.
The reasons for this price volatility are well known: weak supply and recovering global demand.
Due to relatively low cotton prices in previous seasons, production stagnated. Farmers around the world turned to more profitable food crops. Global demand recovered more strongly than expected, especially in emerging economies, but the economic recovery was stronger than expected in many industrialized countries, which were hit harder by the global financial crisis.
Also contributing to the jump in cotton prices was the fact that more speculative money was finding its way into the cotton future markets. Expansionary monetary policy with low interest rates and a weakening U.S. dollar, and the desire to invest in real assets, are the main reasons why prices for commodities have been rising strongly across the board, including those for cotton.
From Boom to Bust and Back Again
According to ITMF’s International Textile Machinery Shipment Statistics, shipments of new machinery plummeted from previous years’ record levels. Shipments of short-staple spindles, for example, dropped from 12.8 million spindles in 2007 to 8.6 million in 2008 and 7.11 million in 2009, only to surge to 12.5 million in 2010.
In 2011, most textile machinery manufacturers were still benefiting from pent-up demand the previous year. Therefore, we suspect that shipments of new textile machinery in 2011 were only slightly lower than in 2010. It can be expected that in 2012, textile machinery shipments also will be lower than they were in 2011.
In the past, cotton purchasing was routine and hedging almost seen as a luxury, but it is indispensible today to protect businesses against volatile cotton prices. Hedging can help textile companies find a balance between being covered with enough cotton for seamless production while minimizing the risks of unpredictable cotton prices.
Liquidity is another challenge. Due to soaring prices and rising costs, financial requirements are higher at the same time banks are limiting their credit lines or – even worse, cutting existing ones in order to meet their own capital requirements. Furthermore, the global textile industry had difficulties passing on rising input costs to retailers, who have reduced inventories and now only order small lots. That makes it tough to be efficient.
Only if you have reliable business partners who understand your business and value quality can you overcome difficult periods. There is no doubt that a consolidation process in the industry will occur over the next three years.
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