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What the Outbreak Could Mean for Cotton and Polyester Prices

With the U.S.-China trade war already negatively affecting the Chinese textile industry, as companies shifted their sourcing to avoid paying higher tariffs and to generally lower risk, the new coronavirus threat is sparking even more uncertainty in the supply chain.

The cumulative effect of the tariff-fueled trade war saw U.S. imports of fabric from China fall to $1.45 billion in 2019, a 27.93 percent decline compared to the previous year, according to data released Wednesday by the Commerce Department’s Office of Textiles & Apparel.

As a supplier and user of the world’s two most dominant fibers–polyester and cotton–the impact of the virus on China’s textile industry creates global concerns. The government’s extension of the Lunar New Year holiday for another week and resultant factory shutdowns will at minimum mean delivery delays and potential labor shortages.

“The unpredictability surrounding the extent to which the coronavirus will spread, coupled with government-mandated production delays in select provinces and cities, has led to uncertainty about how this will impact global manufacturing across various sectors,” Resilience360 said in a new report.

Jon Devine, senior economist at Cotton Incorporated, said at this point “there is still a good deal of wait and see.” One of the best predictors of growth in global cotton consumption, he said, is economic growth, and China has been a key engine of that for the past several decades.

“The longer and deeper the epidemic runs, the more disruptive it will be for both the Chinese and global economies,” he said. “If people are staying home, they are not working and earning. In addition, they are not out spending. All are not great for demand,” including cotton products.

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The latest data from the U.S. Department of Agriculture last week showed that China made its strongest purchases of cotton in nearly two years, Devine said. This followed a prolonged decline in U.S. cotton exports to China during the trade conflict.

“This suggests that the phase one deal may have already motivated some buying,” Devine said. “The virus may put further growth in export sales on hold and therefore prolong uncertainty regarding how motivating the phase one may be for U.S. cotton exports. If the virus is contained soon, there could be a surge in spending as pent-up demand is released. If it lingers, demand that could have been may simply be lost.”

Data and analytics firm Wood Mackenzie said similar to the SARS (severe acute respiratory syndrome) crisis in 2003, polyester demand may weaken as business activities stall.

“The polyester chain could falter amid the economic disruption in China,” Salmon Lee, Wood Mackenzie principal consultant, wrote in commentary. “Concerns among market players in the polyester chain are widespread.”

Central China, where Hubei is at the core and the center of the outbreak, “is in a virtual standstill,” Lee said, with many transport links cut amid the lockdown.

“If the virus spreads further, more cities and/or provinces in China could see a similar lockdown,” he said. “That would be a logistical catastrophe, and disruption to the polyester and textile industries would be disastrous.”

Hubei, and much of central China, is an important manufacturing base for the textile industry, with many mills, and print and dyeing businesses clustered there, Lee said. A prolonged shutdown of transportation would mean even if fiber or fabric factories can get back up and running, product won’t be able to be shipped to the major production centers in China’s coastal provinces.

“Many workers of polyester producers, spinners, weavers and garment manufacturers had returned to their hometowns earlier in January ahead of the Lunar New Year holidays,” Lee wrote. “These workers may not be able to return to work amid the badly disrupted transport network.”

Lee said polyester and downstream production will likely fall this month and could dip further if the epidemic is not brought under control soon. The SARS crisis, he noted, brought down Chinese polyester production for three months.

At the same time, prices fell for polyester products and raw materials PTA and MEG that are its key ingredients.

“The polyester industry, and in extension the downstream textile and apparel sectors, could remain in a lull for some time,” Lee said. “Given the SARS crisis took approximately four months to peak and another two to three months to taper off, this epidemic could also follow a similar pattern.”

Similar to Cotton Inc.’s Devine, Lee said there could be a “silver lining among the dark clouds.” In 2003, the SARS crisis rebound in demand was robust, he said.

“This time, the post-coronavirus markets in the polyester chain may also see a quick and strong recovery by the middle of the year,” he added.