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From The Editor
James M. Borneman, Editor In Chief

Oil's Big Bite On Textiles

James M. Borneman, Editor In Chief

It's not something you see every day: A critical input, oil, doubling in price within one year - an input so critical that it is the very foundation of consumer and industrial life, and a price change so swift that the true effects have yet to trickle through. But the trickle seems to be flowing faster and faster. Price-increase letters are starting to read like force majeure letters associated with natural disasters.

On the transportation and logistics front, the well-oiled systems in place seem destined to force a redirection of global trade patterns and round the edges of our recently flattened world.

In a recent CIBC World Markets Inc. report, Jeff Rubin and Benjamin Tal write: "Higher energy costs translate directly into higher shipping costs. At today's oil prices, every 10% increase in trip distance translates into a 4.5% increase in transport costs. ... Including inland costs, shipping a standard 40-foot container from Shanghai to the US eastern seaboard now costs $8,000. In 2000, when oil prices were $20 per barrel, it cost only $3,000 to ship the same container. But at $200 per barrel, it will soon cost $15,000 in transport costs to ship from China to the US eastern seaboard. "

The report also explains that the increased transportation costs are effectively a tariff on imports into the US ranging from 3 percent at $20 a barrel, 11 percent at $150 a barrel - and at $200 a barrel, "we are back at 'tariff' rates not seen since prior to the Kennedy Round GATT negotiations of the mid-1960s."

The cost of transportation coupled with a demand for fast fashion may bode well for Western Hemisphere manufacturing and those who invested in domestic, NAFTA and CAFTA-DR supply chains. Is the rise in transportation costs and the weak dollar enough to offset the labor and other cost advantages in places like China and Vietnam? Time will tell.

The weak dollar and the global aspect of the US textile supply chain are making inputs and imports more expensive. European parts and equipment face the double whammy of being expensive in US dollars and costing more to ship. Domestic manufacturers that have been able to contain input increases and leverage transportation costs - advantages like being close to sources of cotton or fiber producers - may replace imports or even have an opportunity to export.

Furthermore, demand for greener products coupled with higher oil prices also makes recycled products more attractive. For those who have embraced greener manufacturing - whether they are converting carpet back to chip to be re-extruded, or using mixes of post-consumer and post-industrial polymer products and pushing them back into the supply chain - today's climate is an interesting one.

So, at a time when there are sourcing incentives to shop closer to home, higher oil prices make green manufacturing financially interesting, and a weak dollar that opens the door for exports by US manufacturers, the US textile industry faces a headwind with a weakening economy, rising prices on all inputs associated with oil and rising costs on all imports purchased in euros - truly a volatile mix of opportunities and threats.

July/August 2008




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