The good news for the global textile industry is that raw materials prices are down. The bad news is that demand is soft, causing concerns over profitability.
The 17th International Textile Manufacturers Federation (ITMF) Global Textile Industry Survey revealed that the business situation deteriorated further in November. For those looking for a bright side, while global business expectations for the next six months remained in negative territory, they didn’t get worse, ITMF said. The indicators for order intake, order backlog and capacity utilization rate all dropped globally.
According to the survey, the business situation in the three Asian regions and Europe remained especially poor. On the other hand, in North and Central America the business situation continued to improve markedly.
“Except for the textile machinery segment that still benefits on average from a long order backlog, all other segments found themselves in negative business situations, especially fiber producers and spinners,” ITMF said.
Global business expectations remained negative but “stabilized” at about 10 percent below its July level. Expectations have improved significantly in South Asia and Europe. Business expectations in all segments remained in negative territory, but four out of seven recorded improvements.
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Order intake nosedived in November, in line with a weaker business situation and softer demand–currently the biggest concern for the global textile value chain. Only companies in North and Central America registered a “good” order intake, while all other regions were faced with an “unsatisfactory” order situation.
Except for Southeast Asia and North and Central America, order backlog fell. The only segments where order backlog increased were the downstream segments of garments and home textiles.
Capacity utilization rate dropped in all regions in November, only increasing in the textile machinery segment but fell otherwise.
While “weakening demand” was the biggest concern in the global textile industry, it was followed by the root causes of demand reduction–high energy and raw material prices that lead to high inflation rates.
“The good news is that logistical costs are not much of a concern anymore,” ITMF added. “Concerns about geopolitics, on the other hand, have increased again in the past two months.”
Drewry’s composite World Container Index (WCI) decreased 6 percent to $2,138.70 per 40-foot container or equivalent unit (FEU) for the week ended Dec. 8–the 41st consecutive weekly decrease and has dropped 77 percent compared with the same week last year. The latest Drewry WCI composite index is now 79 percent below the peak of $10,377 per FEU reached in September 2021.
The Cotton Conundrum
Cotton Incorporated’s Monthly Economic Letter, penned by chief economist Jon Devine, said movement in the December New York-ICE futures contract “was extreme, with a series of limit up and down moves over the past month.” After touching levels of near 70 cents per pound toward the end of October, prices shot higher in early November and lifted values above 85 cents per pound.
The A Index, an average of global cotton prices, fell below 90 cents per pound near the end of October but surged over $1 in early November. U.S. spot cotton prices averaged 81.87 cents per pound for the week ended Dec. 8, up from 80.81 cents the prior week, and down from $1.04 a year earlier.
Devine noted in his report that the latest U.S. Department of Agriculture (USDA) report featured decreases in global production and mill-use. The net result for 2022-23 ending stocks was a 600,000 bale decrease to 87.3 million. This ranks as the highest volume since 2019-20.
“The recent volatility in New York-ICE futures has been attributed to various factors, including short covering in the futures market and import interest from China,” Devine said. “The steep increases in early November can also be interpreted as a sensitivity to potential increases in demand for U.S. exports. U.S. stocks are low this crop year and U.S. shipments would have to be rationed by prices if the appetite exists from the demand side.”
However, there are questions whether there will be enough demand to sustain prices at higher levels, he noted. In addition, reports of increases in inventory and order reductions at each stage of the supply chain precede what is expected to be a global economic downturn as the year progresses.
“Chinese government policy related to imports is uncertain, but China accumulated significant stocks at gins last crop year and that cotton remains available,” Devine said. “In addition, the Chinese crop is expected to be larger than last year and Chinese prices are currently lower than the export offers represented by the A Index. This indicates that global export prices are not attractive in China.”
Higher external prices should be a headwind for Chinese cotton fiber and yarn imports, he said, while lower Chinese yarn imports imply lower mill demand for exporters like Vietnam. In turn, Vietnam is a major importer of cotton fiber and lower Vietnamese spinning demand suggests lower fiber import demand from that important market.
“Lower import demand from China may eventually weigh on global export prices,” Devine said. “Lower prices will make cotton less competitive for acreage in 2023-24. Price ratios for 2023-24 futures market prices for cotton over corn and soybeans are among the lowest in the modern era.”
Devine said that for cotton prices to increase, buyers need to be willing to bid up values. It is unclear when that demand might surface with the recent accumulation of inventory throughout supply chains
and slowing global macroeconomic conditions, he noted.
“Recoveries follow recessions and both times that cotton prices reached sustained levels over $1 per pound over the past couple of decades (2010-11 and 2020-21) coincided with recoveries that came after the financial crisis and the Covic-driven recession,” he added. “An eventual recovery from the expected economic downturn in 2023 may enable price increases at some point, but the full effects of inflation, rising interest rates and inventory accumulation may need to be digested first.”
The International Cotton Advisory Committee (ICAC) said in a December report that the 2022-23 season “has gotten off to a difficult start for the cotton industry.”
“On the production side, both the US and Pakistan were devastated by drought and flooding, respectively, while West Africa faced a severe infestation of jassids,” ICAC said. “All caused severe damage to the crops. On the consumption side, fears of a recession still have governments scrambling to control inflation, while the decline in employment in the retail, transportation and warehousing sectors are cause for concern, especially as so many other industries are hiring again.”
The ICAC projected global production at 24.27 million tons and consumption at 23 million tons. Its price forecast of the season-average A index for 2022-23 ranged from 97.9 cents to $1.52 per pound, with a midpoint at $1.15 per pound.
Polyester Problems
Unifi Inc., makers of recycled and synthetic polyester yarns such as Repreve, saw net sales for the quarter ended Oct. 2 fall 8.4 percent to $179.5 million, primarily attributable to temporary demand disruption.
The company anticipates net sales in its fiscal 2023 second quarter to come in about 10 percent to 15 percent lower than the first quarter. It also expects continued profitability pressures and performance problems, primarily attributable to weak cost absorption in the Americas segment in connection with a seasonally pressured period that includes annual customer shutdowns and holidays exacerbated by lower-than-normal sales and productivity levels.
“Our first quarter fiscal 2023 results were adversely impacted by a difficult demand environment and volatile global market,” CEO Eddie Ingle said. “With brand and retailer inventories recently reaching historically high levels, apparel companies and retailers reduced orders and delayed certain programs into calendar 2023. As a result, our demand visibility diminished quickly.”
On a conference call with analysts, Ingle said the company has spent “a lot of time and effort getting to the price point we needed to over the last 12 months.”
“Lower prices will make cotton less competitive for acreage in 2023-24. Price ratios for 2023-24 futures market prices for cotton over corn and soybeans are among the lowest in the modern era.”
Jon Devine, Cotton Inc.
“We are…under pressure to manage prices down, but we are doing our very best to make sure that we stay strong and maintain the margins that are appropriate to the raw materials cost that we have in place,” he said.
The U.S. Bureau of Labor Statistics Producer Price Index showed price for synthetic fibers declined a seasonally adjusted 0.1 percent in November from the prior month. Prices for processed yarns and threads fell 1.5 percent for the month, while the cost of finished fabrics increased 0.7 percent.
Specialty Fibers
Thanks to higher fiber prices, cellulosic fiber giant Lenzing’s revenue for the first nine months of the year rose 24 percent to 1.97 billion euros ($1.92 billion). Lenzing said the market environment deteriorated sharply, especially during the third quarter, and the worsening consumer climate placed additional pressure on its business performance.
However, the company said it will continue on its profitable growth trajectory following the successful implementation of the two key projects in Thailand and Brazil, and sharpen its focus on sustainable and high-quality premium textile and nonwoven fibers. Lenzing is also investing $195 million in China and Indonesia to convert existing standard viscose capacities into capacities for environmentally responsible specialty fibers.
In the first nine months of the year, Earnings decreased 11.6 percent year-on-year to $256.21 million. In addition to lower demand, the earnings trend particularly reflects the sharp rise in energy and raw material costs, the company noted.
“We are experiencing distortions in energy and commodity markets, which are weighing on consumer sentiment and significantly limiting our view of short- to medium-term business trends,” CEO Stephan Sielaff said.
Australian Wool Innovation (AWI) chairman Jock Laurie told the annual general meeting in November that AWI remains focused on building demand for wool during challenging economic circumstances internationally.
“AWI is ahead of the game on traceability,” Laurie said. “And we a very strong position to take it forward. A lot of the traceability stuff was developed by Wool Q. Traceability and sustainability is absolutely critical.”
AWI CEO John Roberts told the meeting that a year ago there were plenty of challenges for the wool industry, including casualization, geopolitical tensions and a desperate shortage of shearers.
“We have a number of additional factors to contend with now, including the war in the Ukraine and the skyrocketing energy price that it brings, domestic floods causing widespread damage across most of the eastern states…and the push for sustainability.”
This article originally ran in Sourcing Journal’s 2023 State of the Industry Sourcing Report. To read the full report, click here.