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Supply Chain Foundation Stable, But Uncertainty Lurks

Sourcing executives are heading into the second half of the year with some stability in raw material prices and freight rates.

But volatility could be just around the next crop season, oil spike or political chaos.

As apparel and textile buyers and production managers scout trade shows and plan excursions in the coming months in the U.S., Europe and Asia, even the often-unpredictable cotton market has been steady.

The New York futures and the A Index, after some swaying in recent months, have leveled off to near-term norms of late. After jumping to over 87 cents a pound in May, values have returned to a longer-term trading range of 76 cents to 79 cents a pound.

Cotton Incorporated’s Monthly Economic Outlook noted that recently, values have been testing the lower end of that range, but have yet to decisively break through support near 76 cents a pound.

The U.S. Department of Agriculture’s Weekly Cotton Market review said prices averaged 66.99 cents per pound for the week ending June 22. This is the lowest weekly average for the season, and was down from 71.38 last week, but up from 62.87 cents reported the corresponding period a year ago.

The China Cotton Index edged marginally higher over the past month, rising to $1.04 to $1.05 a pound.

[Read More on cotton pricesHigh Cotton Prices Persist Despite Rising Global Stocks]

This crop year, the world outside of China is expected to produce a large surplus that will serve as a buffer against the possibility of a sharp increase in Chinese import quota. Whether a buffer stock will be maintained outside of China will be a factor to watch for price direction over the longer term, Cotton Inc. said.

“Demand for cotton around the world is expected to continue to exceed supply, buffering prices above recent averages and indicating they will stay somewhat inflated,” Cotton Inc. said.

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World cotton production is estimated at 22.9 million tons for the 2016-17 crop year, while world mill use is projected at 24.3 million tons, which represents the second consecutive season where mill use has exceeded production.

Australian Wool Innovation’s weekly report for June 15 showed “positive movements across all type categories featured at Australian wool auction markets.” The Eastern Market Indicator rose 2.8% or to $11.47 per kilogram.

The Synthetic Fiber Producer Price Index was 121.9 in May, up 0.1% from April and 2.4% more than May 2016, according to the U.S. Bureau of Labor Statistics. Deeper down the pipeline, the price of a barrel of light sweet crude oil increased 27 cents to $43.01 a barrel on the New York Mercantile Exchange. Oil prices remain down about 20 percent this year despite an effort led by OPEC to cut production.

Petroleum is a raw material ingredient of polyester and nylon, and also impacts overall energy costs for companies, even though alternative fuels have made major inroads in usage.

Cellulosic fiber producer Lenzing Inc. noted in its first quarter report that the macroeconomic environment appears to be somewhat more favorable than in the prior-year quarter, but continues to be impacted by political factors.

“Developments on the fiber markets should be slightly more positive, but still volatile,” Lenzing said. “The wood-based cellulose fiber segment, which is relevant for Lenzing, should again outpace the overall fiber market. The demand for these wood-based cellulose fibers was very good at the beginning of 2017 with the long-term trend pointing towards further growth in viscose and, above all, wood-based cellulose specialty fibers.”

A new study by Business Performance Innovation Network, in partnership with technology specialists Navis and XVELA, notes that the shipping industry is going through a period of economic turmoil, as aggressive shipbuilding and slow growth in world trade since the Great Recession have led to a serious imbalance in supply and demand.

The industry also faces significant problems from inefficiency and waste due to aging technology infrastructure and business processes that are hamstrung by a lack of real-time information sharing and ineffective collaboration.

The World Container Index assessed by Drewry, a composite of container freight rates on eight major routes to and from the U.S., Europe and Asia, was down 1 percent to $1,381 per 40-foot container for the week ended June 29, but up 12 percent from June  2016.

The average composite index of the WCI, assessed by Drewry for year-to-date, is $1,552 per container, which is $127 lower than the five-year average of $1,679, but also 12 percent higher than a year ago.

Ocean freight and logistics giant A.P. Moller–Maersk’s first quarter profit was dragged down by major increases in bunker fuel prices, coming in flat at $201 million.

Maersk Line, the world’s largest container shipping company, reported a loss of $66 million compared to a profit of $37 million in the prior-year quarter. Maersk said market fundamentals continued to improve in the first quarter and demand outgrew nominal supply for the second consecutive quarter.

Freight rates increased 4.4%, which did not fully compensate for the 80 percent increase in bunker price. Maersk Line said it expects an improvement in container rates, and a 2 percent to 4 percent increase in demand for seaborne container transportation.

Rodolphe Saadé, chief executive officer CEO of CMA CGM Group, said in reporting first quarter financials, “In the current shipping context, which is still affected by insufficient freight rates, CMA CGM has continued its positive trend begun end 2016, with further improvement in operating margins and net income. Although the shipping industry still faces strong headwinds, we are confident our strategy should allow to improve operational results over the next quarter, leveraging the new Ocean Alliance and maintaining our focus in operational efficiency and innovation to the benefit of our customers.”

Last year, the Ocean Alliance, comprised of China’s COSCO Shipping, France’s CMA CGM, Taiwan’s Fra Evergreen Marine and Hong Kong’s Orient Overseas Container Line Ltd., was created, along with The Alliance, an agreement between Hapag-Lloyd, K Line, Mitsui O.S.K. Lines, NYK Line and Yang Ming. Most recently, Kawasaki Kisen Kaisha Ltd., Mitsui O.S.K. Lines and Nippon Yusen Kabushiki Kaisha established a new joint venture called Ocean Network Express.

The new ventures are an effort to lower costs and increase efficiency in serving trade routes.

Speaking at the recent American Apparel & Footwear Association Sourcing Summit, Nate Herman, senior vice president for supply chain at AAFA, said of the uncertainty: “Frankly, we also have things that are literally coming out of left field. Because of the diplomatic dispute that sprung up…now any product that moves through the Middle East is running into problems because of the dispute with Qatar. Now you have major container lines saying they’re not even going to go anywhere near Qatar. Qatar is a major hub for ocean and air cargo in the Middle East, so it’s really hard to avoid going through Qatar.”

“Almost every mode of transportation we deal with, whether it’s ocean, air, small parcel, ground transportation, even rail, all have common factors around uncertainly and variability,” Kevin Holian, vice president of global operations at New Balance Inc., said. “I think most logistics people spend most of their day trying to manage that variability.”