March Orders Up; Uncertainty Remains

With the yarn market in the United States — and around the world — in a general state of upheaval,
yarn spinners and brokers are uncertain about what the short-term future holds.

“We got off to a soft start for the year,” said one spinner. “I don’t know that anyone had
really high expectations for January, but I expected things to pick up in February. I really
expected February to be better than it was, but activity didn’t really kick in until the fourth
week of the month. But both orders and inquiries picked up significantly the last week of February
and the first week of March.”

Another spinner said: “Our order pipeline is not very long right now. We have numerous
inquiries from customers, but not a lot of sales activity. We had a spike earlier in the year that
gave us some hope that we would start 2012 off stronger than we expected, but that didn’t last very
long. February was very slow. However, we have noticed both inquiries and orders picking up over
the last week or two and are hopeful that business will improve over the next couple of months.”

Added a prominent yarn broker: “Ring-spun business for me is picking up again, and my
specialty business is good. Commodity open-end (OE) business is okay. In talking to my suppliers,
they tell me they are running pretty good, but that their order backlog is not very long. Many OE
spinners seem to still have some inventory, because they are aggressively quoting prices. I am
seeing the differential between cotton and OE yarn return closer to what is was pre-2010.”

Yarn Market Is Increasingly Global

Overall, however, spinners say they have less feel this year than in the past for how
business conditions are likely to play out. As one observer noted: “It’s hard for spinners to
figure out how to run their companies over the next six months when they have the visibility of
about 30 days. It is a lot more difficult now than it used to be. The yarn market is now truly a
global business, and spinners in the United States now have less control over their destiny than at
any time in the past.”

He added: “When you talk about yarn manufacturers with the capability to dominate the
market, you used to consider only a handful of U.S. companies. Now you are talking about Pakistan,
India, Korea, Egypt and other countries. Companies in those countries have different drivers than
what we are used to. In the United States, we used to know who and where our customers were, and we
knew the direction cotton prices were going. We knew if cotton was X, we could get Y for the yarn.
No longer does that have a lot to do with it. The global yarn market is driven by political
factors, the cost of fuel, the cost of freight and just a whole range of factors that used to not
come into play or, at least, not contribute significantly.”

For example, he said, if India is exporting yarn to Europe and demand suddenly decreases,
the yarn previously earmarked for Europe can be sold in the United States at reduced prices. “In
reality, it doesn’t even have to be sold here. Just the threat of it is enough to keep U.S. prices
in check.”

Evidence of this can be found in the export strategy of India in 2011. Early in the year,
when global cotton prices were at their peak and cotton was in short supply, India did not export
any yarn. Then, when it became apparent that the cotton supply crisis was over, India began
aggressively exporting cotton yarns to the United States. “The problem though, was that Indian
companies had lost their customer chain and the only way to get that back was to drop prices. They
began selling yarn for $2.00 when the price of raw cotton was $2.00. It was a huge disruption in
the market. There really wasn’t any way to compete with that,” this observer said.

Inventory Control Is Critical

With the increasingly global nature of the yarn business, the prevailing wisdom for yarn
spinners is to maintain tight inventory control, said one observer. “Sometimes it might be better
to stand down for a week than to flood the market in times of weak demand and drive prices down
even further. That’s a lesson I’m not sure we in the United States have learned very well.”

March/April 2012