Business Stays Strong; Spinners Optimistic About Second Half Of Year

Business remained brisk for yarn spinners through the first part of June, despite eroding consumer
confidence in the economy and gradually escalating cotton prices.

“Right now, both ring-spun and open-end yarns are moving well,” said one yarn seller. “We
have a good pipeline in place at the moment, and it hasn’t shown any signs of slowing down.”

Unlike during the boom of several years ago, few shortages have been reported. “Business is
strong, but there is still yarn to be had out there,” said one buyer. “I think part of that is due
to the fact that blends became popular back when there was a run on cotton yarns and a lot of
customers never switched back to all cotton. In fact, poly/cotton blends are still moving well.”

Of some concern are delivery times. “Obviously, with higher demand, delivery times move out,”
said one spinner. “At this point, it hasn’t been a huge concern, but customers who were used to
getting their orders filled in a time frame of days or a few weeks are having to wait a little
longer. It’s a delicate balance for us, as well, as we have to face the choice of extended delivery
cycles versus building inventory.”

Another spinner agreed: “We’ve been fortunate in that we are in a position to both build some
inventory and extend some credit, especially for our Central American customers. But that is, as
you know, a double-edged sword. The last time mills went in that direction, we ended up with a lot
of high-dollar yarn and very low prices.”

Overall, spinners remain optimistic about business prospects over the last half of the year.
“We haven’t had any indications yet that a slowdown is on the horizon,” said one yarn buyer. “Most
of the spinners I work with are running full seven-day schedules. Orders are still coming in at a
brisk pace. Over the past few months, I’ve had the opportunities to quote on some very large orders
– larger than what I’ve seen in some time.

Added another spinner: “So far, we’ve had exactly what we’ve needed: a sustained period of
good business. Raw material costs have been stable, and our customers are losing their fear about
the volatility of cotton prices. For a long time, there was some hesitancy to place large orders
because of the huge drop in prices. Neither customers nor mills wanted to get stuck with a large
inventory that was way above the prevailing market cost.”

Cotton Prices Rise While Consumer Sentiment Falls

Two developments in recent weeks, however, are raising the eyebrows of some spinners: the
price of cotton and several reports about eroding consumer confidence. As noted by the spinner
above, cotton prices have remained relatively stable for most of the year. However, prices began to
move up again in June, closing above 83 cents per pound for the week of June 20, up more than 13
cents per pound over the corresponding period a year ago. Futures prices for later in the year
topped 90 cents per pound.

“Some movement in the price is to be expected,” said one yarn broker. “An extended period of
favorable business conditions will obviously impact demand in a positive way, and that will
escalate prices. What we do not need to see, however, is the rapid rise of a few years ago, when we
went over $2 per pound in a very short period of time. As of the moment, we are not overly
concerned, but we will keep a close eye on prices.”

Also with the potential to negatively impact the industry is the report by Reuters that the
Consumer Sentiment Index reading for June declined and was substantially below expectations. The
index fell to 73.2 in June, from 79.3 in May. It was the lowest level in the past six months. Also,
at the end of May, the U.S. Department of Commerce revealed that consumer spending fell in April,
the first such decline of the year.

“While the overall level of consumer sentiment is substantially above last summer’s low –
which would normally indicate a growth slowdown, not a downturn – the buying plans of upper-income
households have also sharply declined,” survey director Richard Curtin said in a statement.

“Since these households account for a large share of total spending, if the declines continue
in the months ahead, it could have a substantial impact on total spending.”

One industry expert noted: “The June figures follow on the heels of May, which were among the
highest in the past six years. Obviously, it is our hope that this is a temporary thing. We don’t
find a one-month drop to be alarming. If a pattern emerges, that will be a different story.”

June 2013