Textile Demand Increase Will Offset Loss in Market Share
April 12, 2012 The world textile industry has seen fundamental changes in the past decades, mainly associated with two major developments: First, the integration of the textile sector into the general framework of the World Trade Organization (WTO) in 1994 after more than 40 years initiated the termination of the traditional quota-regime by the end of 2008. Second, the gradual opening of the Chinese economy in the early 1980s and later, when China was formally integrated into the framework of the WTO at the end of 2001, accelerated the process that is generally known as globalization.
Both developments have led to an ever more integrated world economy and have certainly contributed to the immense increase in global trade. Global trade of manufactured goods soared about 250% between 1990 and 2009 to about $8.4 billion. During that time, global trade in textiles doubled to about $211 billion. For clothing, worldwide trade surged 192% to $316 billion.
The global financial and economic crisis led to an unseen decline in demand and investment which resulted in shrinking GDPs, lower trade, higher unemployment levels and saving rates, and finally, a recession in most of the industrialized countries.
The Textile Industry Was Hit Hard
The global textile and apparel industry has been hit very hard by the global financial and economic crisis. This becomes evident by looking at imports and exports figures for apparel and clothing. While imports reached a monthly average of $30 billion in 2008, they fell to $27 billion in 2009 and $26 billion in 2010.
Looking at developments since 2009, the scale and scope of the global economic crisis becomes even more visible. In May 2009, imports of apparel and clothing amounted to only $21.5 billion. That number jumped to almost $32 billion over the next two months, showing the strength and speed of the recovery. However, imports dropped again throughout 2010 – on a monthly average – and fell below both 2009 and pre-crisis levels.
ITMF’s State of Trade Report (STR), in which data of yarn and fabric production in major textile producing countries is published on a quarterly basis, confirmed the general downward and the v-shape recovery since the second quarter of 2009. The strong rebound in global yarn and fabric production was mainly driven by Asia in general and China in particular.
Theoretical Pass-through Analysis of Cotton Prices
It is interesting to know how much soaring cotton prices really have an impact on retail prices of apparel. A theoretical pass-through analysis of cotton prices was conducted by Jon Devine, economist at Cotton Incorporated, and Alejandro Plastina, economist at the ICAC. They took four typical apparel products – T-shirt, polo shirt, woven shirt and a pair of jeans – and calculated how much an average increase of 0.85 US cents/lb. has on the final retail price (the average increase of cotton prices in the season 2010/2011 compared to 2009/2010 was 0.85 US cents/lb).
Based on the required amount of cotton in all these products (see chart at right), the theoretical price increases would have been 35 cents for a T-shirt, 46 cents for a polo shirt, 43 cents for a woven shirt and $1.63 for a pair of jeans. Based on the average retail prices for these products, the price increases would have been between 1.8% for a T-shirt and 4.5% for a pair of jeans.
Because global demand for cotton depends heavily on the state of the global economy, it is indeed difficult to forecast demand since the probability for double-dip recessions in some regions became certainly higher in the recent past (i.e. Euro-crisis, sovereign debts crisis in the EU, weak US economy, “international currency war”, etc.).
In addition, for many textile mills, the risks involved with volatile markets and weakening global demand are existential and have led to mills reducing capacity or even closing. Textile mills are sandwiched between volatile and increasing input costs – especially raw material, energy and labor – and the limited scope to pass them on to the retailer/end consumer.
In a market of rising raw material prices, the industry was by and large able to pass on increasing raw material costs. Further downstream price increases were more difficult to pass on. But, when raw material prices reversed, the industry was faced with expensive inventories of raw materials and falling sale prices. Good profits turned into hefty losses.
High raw material prices, combined with other rising input costs like labor or energy, make it even more difficult for the industry to pass on their costs. While bigger textile mills are often stronger and flexible enough to absorb or pass on higher input costs, smaller mills were often forced to stop production.
Another major challenge for textile mills was to have enough working capital to finance higher input costs. Mills with a weak balance sheet quickly found themselves in trouble as banks were hesitant or unable to prolong and/or extend credit lines.
Nevertheless, rising cotton prices also had a positive effect. In the past 20 years, retailers and consumer grew accustomed to decreasing prices. The bargaining power was with retailers that focused mostly on prices and less on quality and/or service.
With the extraordinary rise of cotton prices, retailers learned suppliers cannot and will not provide them with the required products and respective quality unless they could also make a profit. As a consequence, many textile mills in emerging economies turned away from supplying international markets towards supplying their respective domestic markets. Big international retailers are reacting by reducing the number of suppliers and concentrating more on reliability than on price only. Smaller international retailers are putting a lot of effort into strengthening their partnership with reliable suppliers in order to secure supplies.
The Long-Term Outlook for Global Textiles
While there is no doubt that the global textile industry is undergoing a very difficult and risky time, there is also no doubt that the long-term perspective is bright. The main reason for this assessment is that global fiber consumption will continue to expand in the foreseeable future. According to PCI Fibers, global fiber consumption increased between 2000 and 2010 from around 55.4 million tons to 77.1 million tons, a gain of 45%. The company expects a further increase of 30% to 99.1 million tons by the year 2020.
The main factors for this increase in fiber consumption are, first, a growing world population that grew from around 6.1 billion in 2000 to 6.85 billion in 2010 and that is expected to reach 7.6 billion by 2020. Second, it is also expected that real global GDP will continue to grow by around 3% annually. This, in turn, will result in higher per-capita consumption of fibers. According to PCI Fibers global consumption increased between 2000 and 2010 from 8.8 to 11.6 kg per capita and will continue to do so reaching 13.1 kg per capita by 2020.
Because cotton is competing with food crops for limited arable land, the large majority of additional fiber consumption will have to be met by man-made fibers. PCI Fibers estimates that about 2/3 of additional fiber demand will have to come from man-made fibers. If average global per capita cotton consumption were to reach the level it is in the United States, cotton production would need to quadruple to about 470 million bales.
While cotton’s share in global fiber consumption will continue to decrease in absolute terms, cotton consumption will continue to rise, especially by improving yields.
GET THE NEWSLETTER TODAY!
