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Yarn Market
James L. Lemons, Ph.D., Technical Editor

Premium Products At Commodity Prices

James L. Lemons, Ph.D., Technical Editor

T he retail sales outlook for this quarter is weak and is likely to remain uncertain, according to a recent report from Gary Rappaport, chairman, International Council of Shopping Centers. Rappaport contends consumers are backing away from trendy label fashions that sell in upscale department stores such as Bloomingdales. It seems many high-end designers have seen their profits hurt by the ongoing problems within this segment of their businesses. Many are selling a variation of their labels to mass market chains such as Target, JCPenney and Sears.

The goods news for yarn manufacturers is that this ultimately will lead to additional business and potential new customers. As one spinning executive said, “We are doing business with customers we would not have even considered six months ago.” A plant manager indicated his company was taking spindles off commodity-type yarns to fill these niche orders as fast as possible. The downside is customer expectations for these yarns do not match the pricing. Although cotton and polyester prices have increased substantially, spinners are not able to pass these increases on to their customers. As the vice president of one of the largest spinners said, “We are being asked to produce a premium product at a commodity price.”

Is Iraq The Only Problem?
Federal Reserve Chairman Alan Greenspan seems to think the major problem with our economy has been the standoff with Iraq. He argues that oil prices have soared more than 60 percent over the past year. Based on the Consumer Price Index, prices rose by 0.3 percent in January. However, virtually all of the price increases occurred in the energy sector, while the cost of clothing and new cars actually fell.

Iraq currently ships two million barrels of oil a day. Members of the Organization of Petroleum Exporting Countries (OPEC) recently agreed to stick with their current crude oil production quotas of 24.5 million barrels a day. OPEC did agree to boost output in the future to keep supplies flowing in case of any disruption of shipments from Iraq. Many observers feel the actual impact on supplies and prices could be more severe if fighting spreads beyond Iraq to other areas in the region.

The weaker dollar has helped to narrow the trade deficit by 8.4 percent to $44.9 billion. Exports of US goods actually increased by 1.6 percent to $81.9 billion in January. Therefore, Greenspan feels we are on the road to recovery.

Many economists aren’t buying Greenspan’s prediction that the economy will rebound once the situation with Iraq is resolved. Many point to the fact that consumer confidence fell to a nine-year low last month. They contend the decline in imports reflects the more cautious mood of US consumers. Although factory output is up, US factories are running at 75.7 percent of capacity. Finally, it is hard to disregard the 308,000 jobs lost in February that pushed the unemployment rate to 5.8 percent.

Greenspan may be right, but don’t bet on it. As one textile CEO said, “There is still a lot of overcapacity out there, not only in textiles, but in all segments of manufacturing.” Even a quick outcome in Iraq will leave a lot of uncertainties. Many analysts predict the Fed will cut interest rates again to prevent the shaky economy from falling back into recession.

Niche Strategies
Investors are betting that companies with brand names, niche products and new business strategies are beginning to find ways to turn the corner. As one textile CEO said, “The hard times have taught us some valuable lessons. We are a stronger company now. We have implemented some strategies out of necessity that should have been followed years ago.”

Foreign competition has been responsible for closing a vast number of firms over the last few years. This same competition has forced successful firms to examine the way they do business. These firms recognize they must justify their existence in a global competitive market. Many are considering moving some production offshore, or at least partnering with foreign firms. They are discovering that delicate balance between maintaining a domestic manufacturing base and sourcing finished goods or raw materials from foreign suppliers. These firms are moving away from commodity-based textiles towards high-tech, value-added product lines.

April 2003

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