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Cotton’s Decline Unlikely to Benefit Overall Sourcing Costs

The International Cotton Advisory Committee (ICAC) recently lowered its outlook for cotton prices, which are down roughly 20 percent year-on-year reaching a 5-year low, but this decline may only do little to offset overall sourcing costs.

Increasing costs for labor and compliance may diminish the benefit from cotton’s decline, leaving unit costs for apparel flat to slightly up for the first half of 2015.

In its “Sourcing Survey Vol. IV: Cotton Benefit May Not Move The Unit Cost Needle Much,” financial services firm Cowen and Company revealed that cotton’s move lower won’t affect much early next year and that increases in emerging market labor costs will play a role in offsetting the dip in cotton/fabric costs in the second half of 2015.

The ICAC said last week that the world cotton industry is expected to enter its fifth consecutive season of cotton production surplus. World production is forecast to decline by 400,000 tons to 26.05 million tons, while consumption could grow by 4 percent to 24.4 million tons.

Half of the 16 sourcing executives surveyed in the Cowen report said they see apparel unit costs increasing at a low single-digit range in the first half of next year, while 31 percent see unit costs flat and 13 percent expect a low single-digit decline.

Considering unit costs for cotton-based products specifically, 63 percent said they see unit costs flat to up, and 37 percent said they expect a decline. As the cotton price benefit flows through in the later half of 2015, 31 percent of respondents see overall unit costs for cotton-based products being flat, and 31 percent say they will be slightly up.

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Products like denim and T-shirts where cotton is more prevalent will benefit the most from cotton’s decline, favoring teen retailers like American Eagle and Abercrombie & Fitch, and companies like PVH whose businesses skew toward those categories.

But despite the more favorable cotton prices, John Kernan, Cowen and Company CFA and director, said the cost benefits won’t be enough to bring the teen retailers back from the brink.

“I still think there’s a lot of headwinds for teen retailers based on the competitive environment with fast fashion retailers and increasing competition from online retailers,” he said.

Cotton aside, the ever-increasing demand for athletic, or athleisure, apparel—which is largely synthetic based—is expected to continue.

“Our survey respondents see demand for Athletic apparel remaining into next year, and denim remaining the weakest category. This trend clearly points to demand for cotton based apparel remaining fairly weak and demand for athletic/synthetic apparel extremely strong,” the report noted.

Kernan said industry experts have said there’s a really strong demand for trends in activewear, but because prices are so much higher than cotton for some synthetic materials and the supply is limited, costs are going up.

In terms of supply chain costs in emerging markets, like labor and compliance costs, which have continued to grow globally in light of recent garment industry calamities like the Rana Plaza building collapse in Bangladesh, the report found that labor cost increases will continue. “Our contacts, and prior survey work, suggest that labor costs in China, Bangladesh, Pakistan, Cambodia and Vietnam could all increase over 20% yr/yr in 2015 – with Bangladesh labor costs increasing over 50% yr/yr,” the report revealed.

Cowen and Company noted that China’s labor costs have been a major driver of increased labor costs in factories, and said it will be the region where FOB costs are most affected by higher labor costs in 2014.