An Improved Cost-Price Picture

ncouraging cost and price trends continue to blunt the impact of this year’s
recession-driven drop-off in mill activity. Costs are still pretty much under control, and prices
for the most part remain fairly firm.

Looking at raw material costs, tabs for man-made fibers are now lagging year-earlier levels
by about 5.5 percent. And the news is even more encouraging for cotton, where latest spot prices
are off by 13 percent. And this fiber weakness is likely to persist – especially in man-mades,
where tags will be pressured by both continuing relatively low feedstock costs and more-than-ample
global capacity. And in cotton, any increases should be held in check by expectations of another
good crop year, a substantial inventory overhang, and less-than-sensational global demand.

The picture is pretty much the same for labor. Specifically, average mill pay has remained
virtually unchanged over the past 12 months. Add in the fact that productivity continues to inch
ahead, and it suggests unit labor costs may even have inched lower.

Meantime, prices haven’t fared all that badly either. Indeed, greige goods, finished mill
products and industrial textiles have increased 2 percent, 1 percent and 2.5 percent, respectively,
over the past year, thus helping avoid any cost-price squeeze. All this is why mill profits – while
still falling because of lower demand – are managing to remain in positive territory.


More Thoughts On Demand

A few words on the demand outlook may also be in order. To be sure, 2009 numbers continue to
paint a dismal picture – with this year’s expected production total likely to tumble some 15
percent. And compared to just four years ago, the drop should be an even more precipitous 35
percent. On the other hand, all these negative numbers have to be put in proper perspective. As
pointed out previously, this huge drop-off seems to be coming to an end. Thus, production activity
has been bottoming out, with little or no appreciable change noted for some four straight months.

The Institute for Supply Management (ISM), which monitors change at the grass-roots
manufacturing level, also seems to back up the changing industry climate. Specifically, four of its
textile indicators – production, order backlogs, inventories, and export orders – have turned
positive over the latest reported month. One top mill executive seems to confirm all this, noting
his firm now sees the first signs of improving activity – though he adds that much of this may
reflect customer rebuilding of inventories. Upshot: The worst seems to be over, and what happens
over the next few quarters will depend on both how fast the economy recovers and how effective the
United States is in keeping textile and apparel imports under control.

Near-Term Question Marks

As far as the overall economic trend is concerned, the news is basically a little better than
it was only a few months ago. Indeed, the bottoming out in gross domestic product – first noted in
the second quarter when this key indicator fell only about 1 percent – is expected to continue.
Most business analysts now predict some growth through the remainder of the year – a marked change
from the decline of the previous five quarters. On the other hand, any gains that do occur are
expected to be relatively modest, probably something in the order of 1 to 2 percent. Implication:
only a limited positive impact on textile and apparel activity.

Meantime, it’s also doubtful whether there will be any help from imports. For one, China
shows few signs of making any further upward revisions in its currency, the yuan, and also seems
determined to provide its producers with additional tax and other incentives. Moreover, other
foreign suppliers seem equally determined to push their exports to the United States as they strive
to recover from their own business downturns. Still another big  import problem is continuing
lax US enforcement of trade rules, as texile fraud – most notably in the form of country-of-origin
mislabeling – soars to new heights. The inescapable conclusion: Given all of the above, textile and
apparel imports are likely to remain a king-sized headache – not only for the remainder of the year
but also for the foreseeable future.