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Textiles 2010: A Light At The End Of The Tunnel

Continuing capital investment, improved logistics, among other factors, are helping to set the stage for an improving economic climate.

Robert S. Reichard, Economics Editor

I t's beginning to look a bit brighter for the hard-pressed U.S. textile and apparel industries. Activity is no longer in free fall -- and, more importantly, the new year is promising continuing improvement.

To be sure, the huge slippages of 2008 and 2009 -- the biggest since the Great Depression -- won't be recouped. In fact, it may be difficult to avoid additional fractional losses over the next few quarters. But, by late in the year or in early 2011, domestic textile and apparel firms could well be sporting some scattered gains.

More importantly, this appraisal is based on more than just wishful thinking. An already improving macroeconomic trend -- with gross domestic product expected to increase 2 to 3 percent this year -- is bound to have some positive impact. Other things being equal, a rising business curve should mean rising incomes and hopefully a concomitant advance in textile and apparel activity.

Equally encouraging: Both textile and apparel firms have managed to weather the recession in tolerably good financial shape. If there's any doubt on this score, take a look at their earnings reports. True, last year's operating profits dropped a fair amount. Nevertheless, mills for the most part have managed to avoid some of the catastrophic losses experienced by many other industries.

Key factors behind this better-than-might-have-been-expected bottom-line performance are the host of innovative steps taken to maintain and strengthen positions in today's hotly competitive marketplace. Companies are making great strides in reinventing themselves -- putting more and more emphasis on raising standards, introducing more improved and new products, and anticipating consumer needs.

To help accomplish these industry targets, mills are continuing to invest in new plants and equipment, despite today's financial restraints. As one company CEO recently put it: "That's the only way to survive. We just can't afford to ignore the latest improvements in productivity and quality."

Still another hopeful sign: Growing realization by Washington lawmakers that more has to be done to level the international playing field. Some halting steps already have been taken, and more are contemplated.

At this point, it might be useful to put some specific numbers onto the industry projections for the new year. As such, here's a more detailed look on how 2010 seems to be shaping up, beginning with demand.

shipments
Activity Is Bottoming Out

Total textile mill shipments should fall only fractionally under last year's close-to-$49 billion level. That's a welcome change from the hefty 10- and 19-percent tumbles of 2008 and 2009, respectively; and even a lot better than the 2- to 3-percent average annual declines of the previous 10 years.

Companies making both basic and fabricated mill products should share in the bottoming-out -- though the fabricated sector could face some lingering problems as the still-shaky housing and office rental markets slow down purchases of both home furnishings and carpets.

Zero in on shipments of rugs and carpets, and this year's shipments could well drop another 3 percent or so to near $9.2 billion, leaving totals significantly under the $13.5 billion peaks hit in 2005 and 2006. On the other hand, by late in the year, improving real estate conditions could lead to some modest turnaround.

The outlook for apparel isn't all that bad either. Improving incomes could make for a fractional increase in domestic garment maker shipments to near $27 billion - a considerable improvement over this past year's disturbing 15-percent decline.

Moreover, this small, anticipated gain could be a bit on the conservative side, as Washington may add to its current stimulus moves -- taking steps that could both speed up any drop in unemployment and improve consumer willingness to spend.

supply
Supplies: More Than Adequate

But whatever the 2010 demand requirements, they all can be met easily by U.S. and overseas suppliers -- all of which have ample or more than ample capacity.

The best measures of availability in the United States are the Federal Reserve Board's textile and apparel manufacturers' operating rates. At latest report, the overall textile mill rate was down in the low 61- to 62-percent range -- a far cry from the 80-percent and higher levels seen in the 1990s.

And the picture is much the same for the apparel sector, in which domestic garment makers are utilizing only about 66 percent of their production potential. Again, that's significantly under the near-80-percent levels of the previous decade.

That's not to say these two industries haven't shut down facilities. They clearly have. But, by and large, these closures have not kept pace with demand declines. Moreover, there is the complicating factor of new plants and equipment that continue to come onstream - not so much because the new capacity is needed, but because more efficient machinery and procedures are required to survive and prosper in today's competitive climate.

Moreover, this excess production potential is pretty much duplicated around the world. Implication: If one supplier can't meet a mill's or manufacturer's needs, a host of others will be willing and eager to do so.

Finally, a few words on inventories: Suppliers, while they have managed to whittle down stocks from their recent peaks, are still reporting days' supply on hand -- positions that are still considerably above levels noted just a few years ago. As such, it's still a "no sweat" situation for buyers who might need an extra supply in a hurry.

table1
A Reassuring Fiber Outlook

Nor do fibers look to create any near-term problems. And that's true for both the key natural fibers -- cotton and wool -- as well as for virtually all man-mades, for which demand continues to mark time and supplies generally remain adequate or even more than adequate.

Looking at man-mades first, China should continue to put some downward price pressure on the market -- that nation's utilization rates are now in the low 70s, according to estimates made by the Fiber Economics Bureau (FEB). On the other hand, some of this man-made weakness could be moderated because Western Hemisphere users increasingly are attempting to purchase their raw materials closer to home in today's volatile times.

Meantime, mills buying domestic man-mades also can look forward to a rather unthreatening year. True, U.S. nylon and polyester textile filament yarn capacities have been drawn down a bit -- pushing utilization rates here up to near the 90-percent mark. But there should be enough around to meet demand. And there is certainly no problem when it comes to polyester staple, for which FEB puts the operating rate at only around 80 percent.

On yet another positive note, little change is seen in man-made fiber petrochemical feedstock costs. This also should help put a lid on man-made prices. As such, Uncle Sam's man-made fiber price index should show no appreciable advance this year.

Nor does the raw cotton situation suggest any difficulties. True, based on the government's wholesale price index, quotes now are running about 9-percent above a year ago. But to put this into proper perspective, that still leaves these quotes some 3- to 4-percent under levels prevailing some 25 years ago. That's not all that bad considering the overall inflation rate over this period.

As for the new year, there could be some further modest updrift. This feeling is confirmed by the International Cotton Advisory Committee, which is forecasting an average Cotlook A Index of 67 cents per pound for the 2009-10 year.

The key factor behind the further upward drift in these tags is the expectation of modest supply shrinkage. Cary, N.C.-based Cotton Incorporated projects a global stock/use ratio of only 47.3 percent at the end of the marketing year -- down from the 55.8-percent figure for 2008-09. And the same trend is seen for the U.S. supply, for which the stock/use ratio is seen slipping from the current 37.6-percent level down to 35.3 percent.

Readers interested in how cotton quotes are determined also might reference a recently introduced cotton marketing model by the U.S. Department of Agriculture - one that spells out how prices tend to vary with shifts in supply and demand (See " Business & Financial," TW, November/December 2009).

Finally, a few words on wool. Demand should begin to pick up along with the economy, particularly for use in outdoor apparel. In any event, companies are increasingly touting items made from merino wool, which is finer and more lightweight than standard wool and can approach cotton in feel.

As for wool prices, latest government numbers show tags not that different from a year ago -- though well above the low levels of the early 1990s. Best bet for 2010: Little more than some very modest advance.

employmentearningsprofits

Few Labor Headaches

Other positive news comes from the wage sector. If latest government statistics are anywhere near correct, hourly wage rates for textile workers over the past 12 months haven't really changed much. Indeed, factor in some productivity gain, and unit labor costs may even have edged lower.

And a not-all-that-different scenario seems to be shaping up for the new year. True, wage rates should begin to edge up as the economy slowly pulls out of the current recession. But at this stage, it's hard to see anything more than a 2- to 3-percent increase in textile worker hourly pay.

But again, don't forget productivity when assessing labor costs. This efficiency factor could well offset projected pay hikes - and in the process, hold unit labor costs fairly steady.

Productivity, however, can be a two-edged sword for workers. While clearly making the industry more competitive, it also has a pronounced negative impact on workforce numbers. Thus, combine efficiency gains with recent drops in demand, and it's easy to see why industry employment tumbled 8 percent in 2008 and 17 percent in 2009 -- leaving totals well under half the levels prevailing just a decade ago.

The labor picture for garment makers isn't all that different. This year, the apparel workforce could shrink about 1 percent. And compared to 10 years ago, the numbers are off by an eye-opening 65 percent.

Nor are these job downtrends likely to end over the longer pull. According to one recent U.S. Bureau of Labor Statistics estimate, the industry will continue to seek increased worker productivity through the introduction of labor-saving machinery and the invention of new fibers and fabrics that reduce production costs.

textileapparelimports
Profits: Still In The Black

Combine all the previous discussions on demand, costs and prices, and the U.S. textile and apparel industries should continue to end up in the plus column.

That was true even during the past year's downturn -- provided one chooses to focus on earnings from production operations rather than the overall bottom-line return that often includes big, one-shot drains due to plant closings and downsizings. Point to keep in mind: it's so-called operating profits that indicate whether or not a firm has the facilities and know-how to effectively compete in today's markets.

One of the most realistic estimates of this operating profit concept is the one calculated by economists at Global Insight, a major business-forecasting firm. Because these profits are obtained by subtracting the two major expense drains -- labor and raw materials -- from sales revenues, it can be considered a rough approximation of what a company has left after deducting major production costs.

And what the numbers show for 2010 can be considered moderately reassuring. In the basic textile mill sector, for example, Global Insight's operating profit forecast suggests there may even be some uptick, with the increase put at close to 11 percent. But despite the projected advance, this earnings yardstick will be just barely more than half the level prevailing as recently at 2005.

A similar, relatively modest 2010 gain is seen for more highly fabricated textile mill products. And again, the projected total will still be almost 50-percent under the levels of just five years earlier.

Last, but not least, there's the operating profit estimated for apparel makers. The 2010 prognosis here is for a basically flat performance. On the other hand, the drop from a few years back is expected to be less precipitous than those noted for textile mills.

Equally significant, Global Insight is not alone in painting a tolerably acceptable profit outlook. Optimism also is being expressed these days by most mill executives -- virtually all of whom are convinced their firms will be alive and prospering well into the second decade of the 21st century.

A Longer Look Ahead

Indeed, the relatively upbeat picture painted for the next 12 months could be the beginning of a major shift in textile and apparel industry fortunes. Put succinctly, the big declines of recent years finally look to be over.

To be sure, going further and further out into the future raises the possibility of an increasing amount of error - primarily because the basic ground rules almost always change over time. These changes can be due to new trade policies, new geopolitical realities, or even changing technology and strategies.

Nevertheless, looking a few years into the future can provide a lot of insight on how these things turn out.

Again, relying on Global Insight projections, here's what the industry might expect over 2011 through 2013, starting with basic textiles like yarns and fabrics: Best bet at this time is for only very modest additional declines in dollar shipments, probably something in the 1- to 2-percent annual range.

As for more highly fabricated textile products, an even smaller -- less than 1 percent a year -- slippage is seen for the same three-year period.

Global Insight also provides some operating profit estimates for these later years. And while apparel earnings over this period may edge a bit lower, those for both basic and more highly fabricated textile sectors are actually expected to show some modest improvement.

The Import Question

Some further comments on the industry's import woes would also seem to be in order. Put simply, incoming shipments continue to grab a bigger and bigger share of the American market.

That was true even in 2009. True, imports of textiles and apparel on a square-meters-equivalent (SME) basis dropped about 10 percent. But because domestic consumption of these products dropped by a somewhat larger percentage, the import share of all U.S. purchases continued to inch up to the point at which it now accounts for the lion's share of every dollar spent on these products.

Not surprisingly, imports of textile and apparel at last report were running an imposing 58-percent above year-ago levels. Go back some 20 years, and the increase is an astronomical 212 percent.

Nor does 2010 promise any respite. TW forecast equations, for example, suggest imports will be up again this year as the U.S. economy slowly improves. As of now, TW sees incoming totals rising some 3 to 4 percent on a SME basis.

This, in turn, virtually assures another textile/apparel trade imbalance increase, despite some gain in exports of these products. Best bet for 2010: A textile/apparel trade shortfall of nearly $75 billion - the equivalent of more than 8 percent of the United States' overall trade deficit.

The biggest impetus for growing imports, of course, has been the huge inroads being made by cheap Chinese offerings. Not even the recession has helped stem the tide here -- with Chinese factories again managing to grow their share of the overall textile and apparel markets over the past year.

And the underlying reasons for these continuing inroads are pretty obvious: the undervalued Chinese currency, which makes China's products unrealistically cheap; and such other unfair trade practices as their domestic subsidies, tax breaks and illegal shipments through other countries.

Zeroing in on the yuan: After creeping up abut 21 percent from mid-2005 to mid-2008, the currency's value has remained unchanged relative to the dollar for a year and a half. This shift in Beijing strategy would seem to indicate that the Chinese will do anything needed to keep their products cheap enough to avoid having to shut down any manufacturing facilities.

And it's a strategy that's working. Halting revaluation has kept the average Chinese factory wage in dollar terms under $1.50 per hour -- a tremendous advantage for labor-intensive industries like apparel.

The big question now, of course, is whether there will be any 2010 changes in Chinese policy. Right now, the answer would have to be "probably not" -- at least not over the next few quarters.

On the other hand, some relief could come as the year draws to a close, as other countries aside from the United States start exerting more pressure. They will probably do so because the yuan, tied to the weak U.S. dollar, has actually been devalued relative to their stronger currencies -- a devaluation that has resulted in cheaper Chinese asking prices in such key areas as Europe and Southeast Asia.

Also likely to limit any big new Beijing export gains to the United States is the fact that the Chinese have already captured the United States' most vulnerable markets. Put another way: Those that remain in U.S. hands are basically product -- differentiated, specialty lines that are hard to replicate.

New Products And Innovations

Meantime, domestic manufacturers are leaving no stone unturned in their efforts to whet consumer appetites and get a jump on the competition. Not only are older products being improved upon, they now are constantly being supplemented by an increasingly technically oriented industry eager and ready to develop new marketing opportunities.

Payoffs from this emphasis on new and better products also are showing up in the export column. Note, for example, that outgoing shipments of technical fabrics recently have been growing at a healthy 7-percent annual rate.

High-tech emphasis aside, all the above is part of a master plan for survival that began decades ago with the introduction of such consumer-oriented products as wrinkle-free and stretch fabrics.

Since then, this list of innovative products has grown exponentially. It includes new plastic formulations, new blends and more eco-friendly lines -- as well as products that provide protection against such problems as sun exposure, bacterial infection, allergies and odors.

More and more nonwovens also have been introduced, including disposables and products aimed at the lucrative apparel, filtration and medical markets. North American sales in the medical area, for example, are now approaching $1.5 billion a year, with the worldwide total put at nearly $12 billion.

Nonwoven use in apparel also is exploding, thanks in large part to the availability of microfibers. Indeed, microfilament nonwovens now are found in fashionable outerwear garments including leisurewear, activewear and workwear.

Elsewhere, new high-performance fabrics have become more important for protection against gunfire. They offer the military and civilian police better-than-ever protection while at the same time being more affordable and manageable.

Then there are new geotextiles. These nonvisible, permeable fabrics seem tailor-made for civil engineering construction projects as well as a host of agricultural applications.

Customized consumer products aren't being ignored either. Witness the bed sheets and pillowcases being marketed to people with chemical sensitivities and allergies. These products are manufactured from materials that do not contain ingredients known to trigger asthma and allergy symptoms.

Also, as noted earlier, mills are reporting success with all their new eco-textiles - fibers and fabrics billed as environmentally friendly and made from such materials as soybeans, corn, milk, seaweed and recycled plastic. And it's all paying off, with a host of new offerings being grabbed up by eco-conscious consumers. The trend is also confirmed by surveys that show more and more consumers saying that buying green is now a major purchase consideration.

Other Survival Strategies

All of the above moves would seem to offer pretty strong evidence of a savvy and forward-thinking industry. So do a host of other current moves -- all designed to keep the U.S. textile and apparel facilities alive and well.

One of the most important of these moves is improved supply management, often referred to as logistics. The aim is to get the right product to the right place at the right time -- and at the lowest possible cost.

This goal has become especially crucial these days as more and more buyers -- ordering on a hand-to-mouth basis -- demand quick delivery. This need for speed also is providing an advantage to Western Hemisphere mills that are a lot closer to final markets than their Asian counterparts.

Still another approach to survival is getting Washington more involved in halting unfair trade practices. The National Council of Textile Organizations (NCTO) probably best sums this up, noting that every industry executive must become more involved in obtaining government support and aid -- particularly in cases involving illegal shipments.

Taking off on this last point, NCTO President Cass Johnson notes that the textile sector now attracts more fraudulent activity than any other industrial sector.

Also, as previously mentioned, there are increasing efforts to develop more specialty items. This is pretty much a necessity in today's dog-eat-dog market, in which selling on price alone can be difficult and sometimes impossible.

Continuing capital investment isn't being forgotten either. More often than not, it's the only way to take advantage of continuing productivity and quality improvements.

True, not all firms can undertake such spending on a massive scale in today's hard times. But, more and more, executives now say that such outlays are a major part of their master plan for the next few years.

Finally, a few words on taking advantage of America's superior network of universities and research facilities, as well as the United States' relatively stringent intellectual property laws. It's a strategy with big payoff potential.

Take Spartanburg-based Milliken & Company. While the rest of the region's low-tech textile industry was fading away, Milliken pushed ahead, investing heavily in research and obtaining a hive of new patents that already are reaping dividends.

As one top executive sums it up: "What we need is an approach that embraces all elements of a successful industry - doing a better job managing costs, placing more emphasis on technology, developing new and better products, and last but not least, improving our marketing techniques."

January/February 2010

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