Textiles 2011: Another Upbeat Year
Signs point to continuing U.S. industry performance improvements despite questions related to a range of potential pitfalls.
Robert S. Reichard, Economics Editor
And the really long-term outlook isn't all that bad either. True, there could still be some erosion beyond 2011, but losses should be quite modest — nowhere near the precipitous declines of the past decade or so.
More importantly, Textile World 's new forecast is based on a lot more than wishful thinking. Indeed, there is a long list of potentially positive factors that could help keep things moving in the right direction (See sidebar).
Not all may come to fruition or be all that influential, but overall, they're a good indication that U.S. domestic producers will be here for the long pull.
Perhaps the biggest industry plus is the general business outlook — one that is pointing to a still-improving domestic economy — albeit at a less-than-sensational rate. Latest projections by Washington, top business leaders and global organizations all tell the same story — namely, that gross domestic product (GDP) recovery, first noted last year, will continue into 2011.
Point to keep in mind here: Historically, consumer demand for fabrics and apparel has pretty much followed GDP on a nearly one-to-one basis. And there's little to suggest any deviation in 2011 — especially because consumers, after cutting back on purchases over recent years, may now be a bit more willing to replenish some of their outmoded or worn wardrobes. All the above positives, however, are in no way meant to suggest that any industry return to the highs of a few years ago is possible. It's now clear, for example, that most of the huge U.S. market share losses — in commodity-type products — are never going to be recouped.
Nor is 2011 likely to be a question-free year. No one knows for sure how the China card will play out — specifically, to what extent the Chinese yuan will appreciate vis-á-vis the U.S. dollar.
And even if the yuan does move up by a significant amount, it would still raise another important question: Would any resulting rise in Chinese asking prices reduce the United States' overall import dependence, or would it simply result in a shift in supply sourcing to other low-wage countries?
There are other uncertainties, too, that could influence industry results over the next few quarters. These would have to include the impact of higher cotton costs on prices, sales and bottom-line performance; American consumers' willingness to loosen their purse strings in a still-far-from-buoyant economy; and economic policy repercussions stemming from the recent U.S. congressional elections.
In short, 2011 looks to be an interesting year — replete with both opportunities and pitfalls. As one top mill executive put it recently: "It's not going to be an easy year. But from all we have seen so far, we're hopeful that 2011 will turn out tolerably well - with at least an 80-percent chance that shipments and earnings will top this past year's level."
Mill Activity Will Hold Up
The modest demand turnaround, first noted about 18 months ago, should continue into the new year. But percentage gains won't be quite as large because they will be compared to the relatively good 2010 — as contrasted to this past year, when results were being compared to a dismal 2009 (See Figure 1).
Figure 1: Textile Demand — No Significant Changes
Source: U.S. Department of Commerce (DOC)
All Charts: 2010 = Preliminary (P), 2011 = Estimate (E)
The fact that fiscal stimulus, though still available, won't be as strong as it was in 2010 should also tend to have some braking effect on 2011 industry performance. Moreover, the expectation of at least some further — though more modest than last year — import gains could also put a lid on any domestic advance.
Nevertheless, TW equations suggest a relatively good performance. Overall mill totals, for example, should rise fractionally on a production basis — with dollar shipments up slightly more because of modestly rising prices. On the other hand, these revenues will still lag 2007 levels by some 20 percent.
One key factor limiting near-term recovery is the still-gloomy housing outlook. With little meaningful construction pickup anticipated, carpet and rug demand — a major component of mill activity — will slip a percentage point or so.
Apparel recovery will also leave something to be desired. True, consumer buying — reflecting the modestly improving general economy — will be up. But the question is how much of any pickup will go to domestic producers and how much to imports.
Unfortunately, imports, despite a decelerating gain, probably will be a major beneficiary of any 2011 improvement. Result: Domestic apparel shipments will continue to edge lower in the new year, probably by about 2 to 3 percent. On a brighter note, however, that's a lot less than the 17- to 18-percent annual declines reports during the 2007-2009 period.
Trade Questions Linger
It might be well to emphasize that TW 's forecast for smaller import gains is by no means written in stone (See Figure 2). Of particular importance here is China, whose shipments to the United States soared 30 percent last year — enough for that nation to account for nearly 50 percent of all U.S. overseas purchases of textile mill and apparel products.
Figure 2: Trade — Import Woes Persist
TW is cautiously optimistic about what will happen. TW sees the yuan slowly and gradually increasing relative to the dollar so that by year end, the Beijing currency will be up anywhere from 7 to 10 percent — enough to have some modest braking effect on the Chinese inflow.
As such, imports from China are expected to advance only about 5 to 10 percent this year. But because other countries are likely to increase their share — because of growing price advantages and improving production and distribution facilities — the U.S. aggregate import increase from all nations is likely to be somewhat higher - probably in the 10-percent range. While hardly a cheering figure, this is still a lot better than the huge import advance of the past year.
Coming back to China, TW 's estimated import total could also be held down if the United States imposes penalty duties should Beijing refuse to change its stance on both the yuan and its many unofficial subsidies to domestic industries.
In any event, the problem of these Chinese subsidies is getting increased attention. Many American officials, for example, say Beijing's non-currency policies are even more important than currency valuation. Many also note it would actually be in China's own interests to take some corrective moves — not only to avoid rest-of-the-world countermoves, but also because a rising yuan could help stem that nation's growing inflation threat.
But perhaps the biggest reason for a Beijing policy shift is that both China and the United States want to avoid a major fight. Many note, for example, that criticism quieted down a few years ago when China permitted the yuan to rise about 20 percent. And, they add, the same thing is likely to occur this time around.
Meantime, don't forget there is also likely to be a positive yuan revaluation impact on the United States' own exports to China. That's because, other things being equal, U.S. products would become considerably cheaper for Chinese domestic buyers.
And while on the subject of U.S. exports, it should be noted that all U.S. outgoing shipments could get an additional push from Washington's National Export Initiative calling for a doubling of America's outgoing shipments in just five years. But, chances are this will provide only minimal help to the U.S. industry because it's highly unlikely the United States can recapture all the commodity-type business lost over the past decade.
Finally, a few words on the United States' textile and apparel trade deficit: Last year, the United States ran better than an $84 billion imbalance. Best bet for 2011 would be for some flattening out. While not great, it should reduce the gain in the red ink trade figure to a modest $2 billion or so — well under last year's huge $10 billion estimated dump.
A Declining Production Potential
Meantime, the fairly upbeat demand levels projected above will be occurring at a time when industry capacity is shrinking, as more and more companies move to dump unwanted machinery and plants.
All the recent shrinkages and their impact on operating rates are seen in Figure 3. Note, for example, that basic mill product capacity has slipped close to 20 percent under levels prevailing a decade ago. Somewhat smaller, though still significant, cutbacks are reported for mills making more highly fabricated products - with production potential off 6.5 percent from 2007 and 25 percent from 2000 levels.
Figure 3: Supply — A Shrinking Base
Source: Federal Reserve Board (FRB)
But all these declines haven't really impaired the ability of U.S. firms to supply the market. Thus, overall mill operating rates still remain under 70 percent, with comparable under-utilization reported in the apparel sector.
One thing is for sure: All this paring makes good economic sense. For one, operating rates are again beginning to creep up to the more viable levels that allow fixed costs to be recouped. More importantly, this downsizing is helping to increase productivity, as most of the cutting has involved old and, more often than not, relatively obsolete and inefficient equipment and facilities.
About the only real supply headaches these days stem from increasing demands for smaller and faster deliveries on the part of mill customers. Reason: They're dropping their old model — one in which retailers placed orders six to nine months in advance and suppliers had to ramp up mills to produce high volume at relatively low cost.
The new customer thinking: Reduce the risk of overstocking by pressing suppliers to quickly ship a small order and then follow up with demand for even quicker reorders if demand warrants such action. Called "chasing," this approach is being adopted by more and more firms.
Aeropostale, a teen retailer, provides a good example of this approach. In the words of one of the company's top executives, "We buy conservatively, and then we 'chase.'" Using this strategy, the company can now restock a popular graphic T-shirt in just 30 days.
These shortening lead-time demands by customers are, in turn, forcing many mills to keep a larger inventory than they might otherwise have held. As a result, mill days' supply on hand, after falling for more than a decade, now seems to be leveling off.
Costs Could Climb
Some problems are also beginning to crop up in another important area — costs. Blame much of this on the huge cotton fiber runup of the last six months.
Actually, three key factors are behind this price spurt, which has left quotes well above $1 per pound — in marked contrast to the 70 cents-per-pound level prevailing just one year ago. Put succinctly, they are: a somewhat disappointing global harvest; modestly rising demand both here and abroad; and the decision on the part of India - a major supplier - to hold back on exports.
Looking at supplies first, latest numbers here put this past year's crop at well below earlier estimates, primarily because of poor growing conditions in two of the largest cotton-growing nations - China and Pakistan. Result: Totals are down from even the previous year's disappointing levels, and not nearly sufficient to meet projected demand, let alone replace the depleted inventories of past years.
As a result, the end of the 2010-11 marketing year should see cotton availability falling for the fourth straight year. One measure of this is the bellwether global stock/use ratio, which is down to near 37 percent, not even within shouting distance of the 55-percent reading prevailing as recently as two years ago.
Bottom line: While some of the speculative pressure of a few months ago has disappeared, most mills now are reconciled to paying a lot more for their cotton over the new year. And that's true even though some firms have locked in their cotton prices through third-quarter 2011 - three months longer than normal.
Several companies, for example, are on record saying that, despite this locking in of prices, they still expect to pay close to $1 per pound for their raw fiber this year.
Nor will it always be advantageous for firms to blend their way out of this problem. To be sure, average man-made fiber tags have remained pretty stable over the past year. But that doesn't hold for some popular polyester constructions for which some quotes have moved up by substantial amounts.
Moreover, with feedstocks for these man-made fibers heading higher, further cost increases in key synthetics seem likely over the next few quarters — though, for the most part, the average hikes are likely to be fairly modest.
One thing is for sure: All these increases will have an impact on textile and apparel prices - primarily because raw material outlays account for a major portion of overall shipment value — two-thirds in the case of basic mill products, and about half in the case of more highly fabricated mill items. There will be more about this impact on both prices and bottom-line performance below.
Labor Costs Fare Better
On a brighter note, there's little to suggest mill employment costs, which account for another 18 to 20 percent of the shipment dollar, will rise. Indeed, if all goes well, the overall worker payroll on a cost-per-unit basis could actually edge fractionally lower (See Figures 4a and 4b).
Figure 4a: Employment — A Dwindling Workforce …
Figure 4b: Employment — … But Earnings Continue To Rise
Source: U.S. Bureau of Labor Statistics (BLS)
Part of this stems from the fact that hourly pay rates for the typical mill worker have been rising, and will continue to do so, extremely slowly. Over the past 12 months, for example, the average hourly pay hike came to only 2 to 3 percent. And a similar small advance is almost certain over the new year. At the same time, luckily for employees, they are working more hours each week. As a result: Their weekly pay has gone up by a somewhat higher percentage.
Also, don't forget the productivity offset. Mill efficiency has been advancing about 2.5 to 3 percent annually through the past decade. And all indications point to pretty much the same gains this year. Do the math, and it means labor cost per unit of mill output won't change that much.
Moreover, this year's estimate for increased productivity could well be on the conservative side. That's because, as noted earlier, the recent paring of production capacity had involved older, more obsolete equipment and facilities. Combine this with the fair amount of new capacity now coming on-stream, and efficiency gains are more likely to exceed than lag the long-term average.
On a more sobering note, it's important to keep in mind such gains can be a two-edged sword. On the plus side, they obviously reduce overall production costs. On the other hand, it means lower mill needs for workers — as each employee turns out an increasing amount of production.
If there's any doubt about the negative employment impact here, compare production and employment numbers over the past decade - a period when mill workforce losses far exceeded production losses. Moreover, include the apparel sector, and the negative productivity impact on employment has been even more pronounced. In terms of actual jobs lost, for example, TW estimates that close to a quarter of a million textile and apparel positions have been eliminated since 2000 because of increased efficiency.
And this is a trend that will continue, with another nearly 10,000 textile and apparel employees expected to receive pink slips over the new year. But while this is obviously bad news for workers, it has been a lifesaver for the United States' domestic industries - helping them keep afloat, competitive and even profitable.
Higher Prices Loom Ahead
Meantime, the rising material costs alluded to above could mean the end of the relatively stable price pattern of the past few years. That's not to say a major runup lies ahead. But it does suggest many mill and apparel products could sport modestly higher tags over the new year (See Table 1).
The cost of cotton, which is expected to remain far above 2010 averages, is the key price propellant - with fabrics and clothing made of the natural fiber bearing the brunt of any new advances. As the chief executive of The Jones Group Inc. puts it: "It's really a no-choice situation. Prices have to go up."
Another large firm adds that price increases will be in place by late winter or early spring, with another round of boosts possible later in the year if cotton costs remain where they are.
To limit increases, some manufacturers are taking another good hard look at their current lines — exploring whether a button or thread can be replaced with a less expensive one, or if they can blend some lower-cost man-made fiber into their products. Another company adds that it now has a dedicated group looking into more cost-effective materials that don't infringe on quality.
How much will mill and clothing maker prices rise? For greige and finished fabrics, TW 's forecast equations now point to 2-percent-or-so boosts. Though still relatively restrained, that's somewhat above the average advances noted over the past decade.
Moving on down to the apparel level, increases in the majority of cases are likely to be considerably higher — with 100-percent cotton lines bearing the brunt of any increases. Some products most susceptible to big boosts are cotton-heavy jeans, fashion items for which customers are less frightened off by high prices and lower-priced cotton basics. Blends, on the other hand, should go up by more modest amounts.
Recent statements by some of the larger apparel firms provide additional hints on the extent of these increases. Though anticipated hikes tend to vary, they run anywhere from 3 percent to as high as 10 percent. Therefore, TW anticipates average apparel tags, after usual discounting, will rise about 4 percent this year. That's quite a lot, considering that these quotes increased less than 2 percent over the entire past 10 years.
Carpet and rug price increases however, could be an exception. Over the past few years, they have been inching ahead only about 1 percent per year. And, given that they are not that much dependent on cotton and 2011 housing demand isn't expected to be all that robust, little more than a similar small hike is seen over the new year.
An Improving Profit Outlook
All these expected price increases, combined with steady or even slightly improved demand levels, should offset fiber cost increases and continue to bolster the industry's earning outlook. To be sure, 2010's big improvements in both profits and margins won't be repeated. But, by and large, currently higher levels will be maintained or even inch ahead (See Figure 5).
Figure 5: Operating Profits: Last Year's Gains Will Hold
Source: Global Insight
Looking first at combined basic and more highly fabricated mill products — after-tax dollar earnings, as reported by the Department of Commerce, should eke out another 2- to 4-percent increase. And that would be on top of their strong 2010 recovery from huge 2008 and 2009 declines. Nevertheless, totals are likely to remain far below recent pre-recession levels.
Textile mill after-tax margins also are beginning to look a little better — with this past year's average return on sales put at near 3 to 4 percent. Again, that's hardly great, but it signals substantial improvement over the negative number reported during periods of last year. And these gains should spill over into 2011.
It's only in the apparel sector that earnings might decline this year. As of now, for example, TW anticipates some slippage from 2010's substantial gains — reflecting the fact that the industry faces continuing competition as well as some retailer and consumer resistance to fiber-inspired price increases. But despite these problems, the vast majority of clothing makers should still end up in the black.
Beyond The New Year
This improved 2011 outlook for the textile and apparel industries should continue into subsequent years. And, while some further industry shrinkage may be unavoidable, any declines that do materialize will be minimal - nowhere near the disturbing textile and apparel declines of the past decade.
To get a better fix on what likely lies ahead, Global Insight has provided TW with new projections that cover not only the next few years, but also extend to the end of the new decade.
Looking first at the 2012-14 period, analysts at this economic forecasting firm see dollar shipments of basic textiles declining at a very low 2 to 3 percent — far under the pace of recent years. And this pattern of very modest shrinkage is seen continuing over following years.
The prognosis for more highly fabricated mill products is somewhat more upbeat — probably reflecting the fact that the U.S. carpet and rug industry will be gradually recovering and will continue to face relatively little foreign competition. In any event, 2012-14 declines in this sector are estimated at only a less-than-1-percent annual rate, with little change anticipated through the end of the decade.
On a more sobering note, given continuing import competition from an increasing number of countries, shipments by domestic apparel makers are not likely to fare nearly as well over the longer pull. But, even here, the declines seem manageable. Put at about 5 percent per year, they will still be well under the near 20-percent domestic slippages reported in 2007, 2008 and 2009.
Long-run profit projections — also based on new numbers provided by Global Insight — aren't all that bad either. Combine the above shipment forecasts with both relatively small increases in costs and relatively firm prices, and Global Insight analysts say bottom lines should hold up tolerably well. Using that firm's rough approximation of profits - sales less labor and material costs - only minimal declines are projected over the 2012-20 period.
Earnings for basic textile mills, for example, look to dip less than 1 percent annually. And in the case of more highly fabricated mill products, they could actually advance at a 3- to 4-percent annual rate.
Again, it's only in the apparel sector that meaningful profit declines are being forecast. The blame has to be put on overseas competition. But even here, the industry, at least on an overall basis, is expected to remain in the black.
Other Encouraging Signs
An impressive list of other factors should also help assure reasonably healthy textile and apparel industries through the next few years. These would have to include new industry innovations, more attention to changing fashion trends, increasing emphasis on "green" products, improved planning and logistical support, and a government more attuned to the industry's domestic and international problems.
As for innovations, the trend toward the introduction of new and improved products is still on the rise. As in past years, a spate of new fibers, fabrics and garments will continue to hit the market — all designed to whet consumer appetites.
Supima® fiber is a good example. This extra-long and strong staple cotton is attracting growing attention by highlighting quality, performance and fashionability. And that's only the tip of the iceberg. Almost every day, new constructions seem to be hitting the market that improve washability, color insulation, stretch and fire resistance; as well as protecting against sweat, odor and disease. On the last point, there are new fabrics that can even monitor vital signs.
There also are exciting new developments in traditional fabrics like denim as mills launch more types that cater to the premium market. These include luxury blends with Tencel®, as well as chambray and twill that can take high-end fashion to jeans.
Nonwovens aren't being neglected either. Indeed, there has been a flood of new offerings for the hygiene, filtration and automotive markets. In the words of one mill executive, "markets for these products will continue to expand, prodded by greater household usage, an increase in product offerings, and the availability of cost-effective recycled fibers that can be used as raw material."
The burgeoning eco-friendly markets also can't be ignored. Levi's®, for one, plans to introduce a new Water<Less line involving washing and finishing techniques that use 28-to 96-percent less water, depending on style.
Reducing pollution also is a major selling point of many mills these days — if only because the textile industry is one of the biggest greenhouse-gas emitters in the world. Still, further pressure for eco-friendly products comes from retailers and consumers who have become increasingly sensitive about their carbon footprints.
Still another plus for the industry is improved planning and strategies. Logistics, for example, has become a major planning tool in light of today's growing insistence on fast deliveries and the increasing distance between supplier and producer. In any event, the vendor who can take an order today and have it in a customer's shop within one to two weeks now has a major competitive advantage.
In yet another sphere, Uncle Sam is beginning to be a lot more helpful to the industry when it comes to protecting against unfair overseas practices. Thus, not only are government officials exerting increasing pressure on China to raise the value of its currency, but they also are talking about more meaningful steps to crack down on fraud by that nation. Special attention, for example, is being given to such Chinese ploys as phony labeling of outgoing shipments to avoid high duties.
To sum up: the impressive list of factors pointing to the survival and prospering of the U.S. domestic textile and apparel industries would seem to be pretty formidable. In the words of one mill CEO, "Given all of today's developments, there's little doubt in my mind that our domestic firms will remain major world-class suppliers — today, tomorrow, and well out into the future."