Business Is Moving Sideways

usiness activity remains relatively steady. Demand for air-jet yarns is strong, with some
softening in the ring-spun (RS) and open-end (OE) market. As one respondent reported, “Our business
isn’t up or down — it seems to be moving sideways.” This seems to hold with the rest of the
industrial sector, as the Institute for Supply Management reported that its index of business
activity remains at 50.5 for the month of August (an index above 50 signifies growth).

Several spinners reported that “orders are decent, but our margins are squeezed by current
pricing.” The return to profitability is further hindered by many spinners having to meet the debt
service associated with highly leveraged balance sheets. One major spinner expressed considerable
frustration with his competition. “Everyone is overreacting to normal demand drops by cutting
prices. We can keep some business, but when do we start turning a profit? We are tired of running
for fun.”

Much of the excess capacity in the domestic market is gone, and a substantial amount of the
inventory in the pipeline has worked its way down. Spinners report they are producing against
orders. With some softening in the market, they are concerned with building inventory.

As one spinner indicated, “It is time to be careful right now. We have scaled back some of
our manufacturing capacity over the last couple of months.”

The Good, The Bad And The Ugly

As the U.S. economy continues to falter, the dollar continues to weaken against other
currencies. This has helped to make domestic yarns more competitive. However, a review of import
data through June 2002 shows mixed results. When compared to June 2001 data, imports of category
300 carded cotton yarns are down, while combed cotton yarn imports are up. As one spinner reported,
“We can’t chase prices on Pakistani yarns. If we cut our prices, they simply cut more — it’s an
endless cycle.”

The recently enacted Trade Promotion Authority bill should provide some additional export
opportunities to the Caribbean Basin, because it maintains the yarn-forward rule contained in the
Caribbean Basin Initiative (CBI). The legislation also increases the caps for knit apparel and
quotas for T-shirts beginning in October 2002.

Raw material prices continue to creep up. Although cotton prices are down more than 3
percent from the averages reported last month, they are substantially up from the averages reported
six months ago. The OPEC nations, which control 40 percent of the world’s oil output, reported to
the World Petroleum Congress that they would “maintain oil prices at levels that are fair and
reasonable.” However, fiber producers are reporting increases in petrochemical prices.

With our current economic and political uncertainties, predicting consumer spending over the
next quarter will prove to be very tricky. Retailers reported very disappointing results from
back-to-school sales in a report released recently by the Federal Reserve. Some merchants are
holding orders until closer to the holiday season to give them more flexibility in changing trends.

So What Now?

As one spinner reported, “Business is getting more impersonal — more price-driven.
Fortunately, some customers are still looking for value-added yarn to help differentiate their
product from the crowd.”

This type of thinking may lead spinners to modify their business strategies going forward.
It is difficult, if not impossible, to be the low-cost producer of commodity yarns in a global
market. The shift may be to more specialization and working with customers in product development —
attacking the problem where they can be more responsive and deliver better service.

Editor’s Note: James L. Lemons, Ph.D., has joined the staff of Textile World as technical
editor, Yarn Market. Lemons is president of the North Carolina Center for Applied Textile
Technology (NCCATT), Belmont, N.C.

He obtained a B.S. degree in textiles from North Carolina State University (NCSU) and, while
working on a M.Ed. at the school, was awarded a grant in the amount of $1,500 to conduct a
five-month study about cotton yarn manufacturing costs and production rates.

Lemons also holds an M.B.A. from Virginia Tech and earned his Ph.D. from the University of
South Carolina. During his career, Lemons has worked for J.P. Stevens & Co. Inc., Dan River
Inc., Tultex and Kellwood Co., in addition to teaching at Virginia Tech and NCSU.

October 2002