2011: Up/Down Year Comes To A Close

For most of the past two decades, it’s been a relatively simple matter for spinners to look back on
any given 12-month period and assess whether it was a year to remember or one to forget.

For 2011, however, that task may not be quite so simple. The past year has been among the
most tumultuous in recent memory. From the beginning of the year, when cotton prices were in the
midst of their meteoric climb to record levels, to the last quarter, when prices were falling just
as dramatically, spinners have had to constantly walk a tightrope balancing supply and demand, cost
and price, and capacity.

“This has certainly been among the most topsy-turvy years in my memory,” said one yarn
broker. “I’ve been around this business for more than 30 years, and I’ve never seen anything like

Another spinner added: “I don’t think I’ve ever seen such a dramatic change, taking place so
quickly, where there was, essentially, no availability of raw material and very little capacity for
manufacturing. And then, just as quickly, there was absolutely no interest in new orders. Keep in
mind that most U.S. spinners were very busy for at least a year and a half, maybe a little more.
And then everything just stopped.”

Early in the year, according to multiple spinners, manufacturers were selling everything
they could make, across multiple product lines and materials. Open-end yarns, which had been in the
midst of an 18-month lull, were in relatively high demand the first part of the year. And ring-spun
yarns were in such short supply that customers were looking well beyond their normal cadre of
suppliers to find availability.

“There was a legitimate concern in the first quarter of 2011 that we would run out of raw
material before we ran out of orders,” said one spinner. “And our customers know the materials
markets as well as we do. They were taking positions for product they weren’t really sure they were
going to need just to make sure they would have positions with their suppliers. The end result is
that a lot of yarn was sold during the first two quarters of the year, even though cotton was at an
all-time high price.”

Momentum Slowed Midyear

As the year began to play out, several events converged to slow the heady momentum the
industry had established. Consumer spending at retail was lower than expected. And, as new-crop
cotton became available, prices began to fall.

“A combination of factors resulted in a significant slowdown in orders shortly after
midyear,” said one spinner. “And I think we are still seeing these factors affect our business.”
First, he said, much of the inventory that was pushed out the door during the first half of the
year stayed on retail shelves longer than anyone expected. Second, as customers began to see the
downward trending of cotton prices, they began delaying orders until the price of yarn more closely
aligned with the existing spot market cotton prices.

“And that’s pretty much where we are now,” said one spinner. “Our customers see that the
price of cotton is falling very quickly. But what they don’t see, because yarn spinners
front-loaded cotton as a result of increasing demand and supply concerns, is that many mills are
still spinning cotton they purchased at 50 cents more than what cotton is currently selling for.”

One yarn broker said: “The best thing that could happen for spinners right now is for the
price of cotton to go back up to about a $1.50 a pound and then come back down slowly. But,
obviously, that’s unlikely to happen. I think what we all have to wait on now is for inventories to
disappear. At some point – and I would guess this would be as early as the first part of Q1 2012 –
we will begin to see the equilibrium point again.”

Indeed, spinners are cautiously optimistic about the first quarter of 2012. Said one: “I
think you’re going to see inventories at retail get to the point where there will be a substantial
increase in orders at the beginning of the year. I look for 2012 to be a bit more normal than the
previous year.”

Added another spinner: “My retail friends are telling me that the initial days of the
holiday season have been stronger than any over the past few years. If that holds for the duration
of the season, it could be very good news for yarn spinners in the months to come.”

November/December 2011