Footwear is inherently complex—requiring numerous materials to form natural or synthetic uppers, insoles, outsoles, linings, laces, metal eyelets, boxes and more—but it is still subject to the same underlying macroeconomic and global forces that affect all fashion categories.
In a presentation at Texworld Evolution NYC last week, Gary Raines, chief economist for the Footwear Distributors and Retailers Association (FDRA), gave historical data and projections for five such powerful forces: cotton (laces), cattle (leather), crude oil (synthetics and shipping), pulp (tissue and packaging) and currencies (about 96 percent of footwear is imported).
Cotton is well off its near-term high touched nearly a year ago, and prices have remained flat at about 85 cents a bale these past few months. Raines sees limited downward pressures for cotton in coming months.
He expects the U.S. harvest size to finish smaller than currently expected, which will lower overall supply. “And while cotton prices typically fall during a recession—like copper prices do—we see only a weak recession ahead, suggesting cotton prices may not ebb much more,” he said.
Cattle, leather & hides
Cattle prices typically respond to short- and long-term supply and demand fundamentals as well. “With the U.S. herd size likely to dwindle again in 2024, we look for cattle futures to remain near recent 7-year highs well through this year and into 2024,” he said.
This outlook suggests wholesale hide prices may see more upside potential, helping narrow the current price gap with current landed prices. “In turn, any firming in hide prices suggests the average landed cost of leather footwear (average landed cost increased 12 percent in 2022 YOY) is likely to rise in concert,” Raines said.
Crude oil touches everything in footwear manufacturing and distribution, from synthetic rubber to a range of petrochemicals and polymers to synthetic fiber. It also drives shipping costs, be it over land, sea or air.
Current forecasts expect “crude oil prices (now just shy of $80/barrel) to retreat—modestly—over most of the next two years, owing in part to gradually rising inventories of crude oil and liquid fuels,” said Raines.
Synthetic rubber prices tend to trend in step with changes in crude oil, so the earlier outlook for sagging oil prices also suggests a retreat for synthetic rubber prices. Raines also made the connection between synthetic rubbers and “already weak” naturals, projecting that if prices for synthetic rubber continue to decline, then prices for natural rubber also may ebb lower.
Regarding getting footwear to the U.S., oil is a crucial factor. Lower oil prices suggest lower bunker fuel prices used aboard water vessels, implying lower trans-Pacific costs to move footwear from Asia to the U.S. “We also see the volume of containers reaching L.A. and Long Beach ports has fallen sharply in recent months as consumer demand has slowed,” Raines said. West Coast container volumes have sunk to their lowest levels since May 2020 (to 600,000 TEUs).
“Combining these imports and container rates, we see the run-ups, spikes, and recent plunges in both,” he said, pointing out that current container rates from China to the U.S. West Coast are down about 91 percent year over year.
Crude oil prices correlate with diesel prices, so if oil trends lower over the next two years, retail diesel prices will likely also follow. This hints at lower trucking costs for footwear moved across the country.
Pulp prices don’t just impact costs for shoe boxes and tissue paper for packaging, but also cardboard and paperboard used in distributing and shipping footwear.
While pulp prices are trading at near-record levels, if inventories continue to grow faster than shipments, the inventory to sales ratio will loosen further, suggesting lofty pulp prices may plateau and then taper.
Footwear imports jumped to a record high in 2022, but duties and import charges on that footwear surged even more, also to a record. Over time, changes in these duties per pair have trended closely with the average landed cost, so such higher average landed costs have contributed to higher average retail prices for footwear.
Raines, however, predicts that upward trend will change in 2023. “Footwear imports are now growing much faster than footwear spending,” he said. “In effect, supply is outpacing demand, weighing on price.”
China, the largest supplier of footwear to the U.S., naturally has the largest market impact. The average landed cost of footwear from China has decelerated sharply in recent months, and FDRA believes this is primarily due to recent weakness in the country’s currency. “If this weakness persists, the average landed cost from China is likely to turn defensive,” Raines said.