Undoing the Crash
March 16, 2010 To borrow from Dickens: it was the best of times, it was the worst of times; it was the age of wisdom, but it was also the age of foolishness. This really sums up my feelings about the past few years. The economic crash of 2008, which was preceded by the boom years of 2005-2007, not only rattled the confidence of many but also laid bare for all to see that the previous boom was really more of a bust in disguise. The global financial system proved to be a house of cards, built with a shaky foundation and even shakier rafters. For cotton and textiles, as that house collapsed, some were hit by the falling debris: many of the world’s best known cotton merchants and textile mills are no longer in business today. Casualties of the times, I suppose.
Needless to say, the past eighteen months have challenged the global fiber markets like never before. Until this point, world fiber demand expanded every year over the last two decades, climbing to a record high of 69.1 million tons by 2007. But as aggregate demand plunged for virtually all fibers in 2008, demand for the two most widely used fibers in textiles and apparel —cotton and polyester — accounted for the bulk of the loss in total fiber demand. This article reviews the impact of this lost output in 2009 and looks ahead to the potential for a rebound in textile demand — especially for cotton — in the New Year.
The timing and confluence of several disastrous economic undercurrents came to a crescendo over the last two years, resulting in the biggest collapse in aggregate demand for the world economy on record. For the first time since the Great Depression, global economic output shrank in 2008, with wide-ranging repercussions across geographies and industries. As the world economy contracted, per capita incomes in many markets fell, standards of living declined, and purchasing patterns shifted away from luxury and discretionary items to more purchases of core staple items. On the supply side, frozen credit markets and volatile swings in foreign exchange rates last year limited manufacturers’ ability to effectively manage financing, production, and inventory costs, resulting in an unprecedented retrenchment in output across the supply chain. This rhetorical receding economic tide lowered virtually all ships, including global demand for textiles and apparel, resulting in an unprecedented contraction in global fiber demand.
Over the decades, global mill demand for cotton grew in response to higher standards of living around the world, expanding disposable incomes, and burgeoning consumer preference for cotton in many key markets. Driven by aggressive promotional efforts in certain markets, global end-user demand for cotton climbed to unprecedented heights in 2007, only to plunge at a record rate in 2008 from the fallout of the global economic crisis.
Cotton demand by the world’s textile mills fell an unprecedented 2.7 million tons from the year before, tripling the second-biggest fall on record set in the wake of the global economic slowdown in the 1970s. This drove mill usage of cotton down to 24.2 million metric tons, erasing the gains recorded over the last half decade.
Cotton mill activity is posting a modest rebound in 2009-10, driven primarily by renewed activity in China. Mills are expected to use an additional 735,000 tons this marketing year, comparable to the average annual increase over the decade leading to the 2008-09 crash. But even so, at just 24.9 million tons, mill demand for cotton will still fall well short of the 2006-07 record and stands as the second lowest in the last five years.
Contributing to this tepid recovery, we expect mill demand to see only a modest improvement in the new marketing year, as growth in retail end demand for cotton textiles and apparel is expected to remain lackluster. Forecasts from the International Monetary Fund suggest that a rebound in the global economy in 2010 is likely to be sluggish with risks weighted to the downside, and the advanced economies as a group are still projected not to show a sustained pickup in activity until the second half of 2010. With the bulk of global cotton textile and apparel end demand happening in the U.S., European Union and Japan, this dims prospects for a rapid rebound in the sector, imperiling the near-term outlook for cotton mill demand.
Looking further ahead, FCStone models suggest global aggregate output will re-accelerate in the next five years closer to trend, helping to buoy resurgent mill demand for cotton. Over time, global mills’ cotton use rose an average 295,000 tons per year. Assuming this average growth resumes after 2009-10, mill demand in five years could climb to a record 27.5 million tons.
As has been the trend over recent years, China is expected to realize the lion’s share of the rebound in global mill demand for cotton over this five-year horizon. Just a decade ago, Chinese mill demand accounted for hardly one-fifth of global cotton usage. Now, over two in five bales around the world are used in Chinese textile mills. Along with the rest of the world, Chinese mill usage of cotton plunged in 2008 in response to a dearth of downstream demand. Assuming Chinese cotton demand only rebounds in coming years to its 11.2 million-ton record set in 2007-08, this would account for half the increase in anticipated global cotton demand. Considering recent evidence showing cumulative fixed asset investment in China’s textile industry expanding again in 2009, we look for mill demand to respond in turn in 2010, and likely expand beyond its record set three years ago. If so, this implies Chinese mills will continue to take market share from other cotton-consuming nations around the world, expanding their presence on the global stage.
Longer term, FCStone models indicate worldwide cotton demand is likely to continue its path of expansion each year, but growth is expected to decelerate near the ten-year forecast horizon, owing to creeping market share from synthetics, increasing saturation of cotton end use in non-traditional markets, and prospects for longer-term slowing of the world economy.
An issue likely to continue to constrain prospects for rapid growth in global cotton demand in the long term is synthetic fibers’ increasing share of total fiber demand. Dating back almost four decades, cotton was the dominant fiber used in global textile and apparel applications. But with each passing year, cotton continued to lose share to synthetics — particularly polyester — as demand for synthetics grew faster. By 1993, cotton had relinquished its dominant position to synthetics, never to regain it again. We expect this trend to continue over the forecast horizon of this study, limiting the potential growth rate in cotton demand.
So, to sum up: the New Year promises to see a continued rebound in global textile demand from the record contraction witnessed in 2008. While some markets — particularly across Europe and South America — will be slower to respond to improved downstream demand signals, other markets — particularly in China —are already enjoying double-digit growth in textile output. Longer term, we look for global cotton mill demand to continue to expand as a result, albeit at a slower rate than witnessed in the recent past.
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