Balancing softness in fiber and fabric prices with increased costs brought on by tariffs already in place and the threat of new ones by President Trump, the outlook for textile and apparel prices remains uncertain.
The short-term outlook appears to be a slow rise in final prices at the wholesale and retail level as companies protect profits against 10 percent or higher tariffs. At the same time, while market forces have mostly kept raw material prices at bay, fiber costs are also caught up in the volatility of the U.S. and Chinese trade policy and its reverberations on global sourcing and the supply chain.
Moody’s Investor Services noted in a report on the state of U.S. apparel companies that lower cotton prices have provided some relief, but synthetics and polyester remain elevated.
“Cotton prices have declined significantly over the past year as demand has slowed, particularly in China, and supply has increased,” Moody’s said.
U.S. spot cotton prices averaged 61.36 cents per pound for the week ended Nov. 14. That was up from 61.09 cents per pound the previous week, but down from 72.84 cents a year earlier, according to the Department of Agriculture. The Producer Price Index for synthetic fibers was flat in October compared to September, when it fell 0.4 percent in September, and was up 0.1 percent for the year, according to the U.S. Bureau of Labor Statistics.
Jon Devine, senior economist at Cotton Incorporated, said, “With the tariffs that went into effect in September, its effects now span the cotton supply chain from fiber to apparel. On top of that, the trade dispute is associated the global economic slowdown, and that implies weaker fiber demand.”
Devine noted two factors that have affected cotton prices. One is the trade war’s impact on China’s cotton usage and imports from the U.S. While China has worked off its reserves in the last few years and is in a position to start ramping imports higher, tariffs have gotten in the way.
U.S. cotton was on the July 2018 list of exports to China hit with a 25 percent increase in tariff rates. This pulled U.S. exports to China 35 percent lower in 2018-19 and in the current 2019-20 crop year, the U.S. is forecast to produce a crop that is 3 million bales larger.
“Other markets like Pakistan and Vietnam have been buying healthy amounts, but it could prove hard for the U.S. to sell that additional production without China increasing its purchases,” Devine said.
A second large-scale transition has been the reduction in prices for crops such as corn and soybeans that can compete for cotton acreage. The decline in prices for those crops has made cotton more attractive without cotton prices having to be high, Devine said.
Synthetic fiber prices have also showed the impact of a slowdown in demand and overall market volatility.
“Weakness in domestic markets has led to a drop in [fiber] prices during the third and fourth quarters, much more than the raw materials would indicate for most of the fiber types,” Laura Murphy, research director for PCI Fibers/Wood Mackenzie Chemicals, said. “Initial indications for 2020 show continued weakness many of the fiber types, and prices continue to erode.”
Craig Creaturo, executive vice president and chief financial officer (CFO) at polyester and nylon yarn manufacturer Unifi Inc., said the company’s drop in gross profit in the third quarter from $20 million to $17.4 million and an margin decline to 9.7 percent from 11 percent was primarily attributable to competitive pricing pressures that were most pronounced in Brazil and Asia, along with a higher proportion of sales in Asia.
“The decrease was partially offset by a more favorable raw material cost environment in the U.S., Creaturo said. “Looking at this from a segment perspective, polyester primarily benefited from a more favorable raw material cost environment, increasing gross margin by 100 basis points from 7.8 percent to 8.8 percent.”
Lenzing Fibers said capacity expansions for standard viscose, coupled with sluggish demand due to the trade conflicts, caused higher pressure on prices, which fell to a new historic low in the third quarter.
“Driven by the challenging situation in standard viscose and low paper pulp prices, prices for dissolving wood pulp remain on a comparatively low level,” the company said of the key ingredient in its cellulosic fibers, adding similarly that “caustic soda prices in Asia have already declined significantly over the past months.”
Another factor is currency related, noted Moody’s, which said the strong dollar “is a looming risk in 2020” and “will likely lead to higher costs in 2020.” Because apparel companies normally source products from foreign manufacturers in dollars and sell goods in foreign markets in local currencies, a stronger dollar will increase the foreign entity’s costs of goods sold.
Apparel brands have been caught in the middle of the supply chain woes and political upheaval, but lower raw materials price have eased some price pressures.
Barry Hytinen, CFO at Hanesbrands, said adjusted gross margin of 38.7 percent declined 50 basis points over last year, as “the impact from foreign exchange rates drove 20 basis points of the decline, with lower innerwear margins accounting for the remainder.” Hytinen noted that higher margins at the company’s Champion brands partially offset the decline.
“The price increases we implemented earlier in the year offset input cost inflation in the quarter,” he said. “As we said before, Q3 was expected to be the peak for commodity cost. Now that we’re past the peak, looking to the fourth quarter, we expect the net benefit from pricing to drive gross margin expansion over prior year.”
Retail apparel prices fell a seasonally adjusted 1.8 percent in October compared to the previous month, as the fourth quarter price promotions kicked in, according to the U.S. Bureau of Labor Statistics’ Consumer Price Index report.
This followed a 0.4 percent decline in retail apparel prices September. Apparel prices were also down an unadjusted 2.3 percent from October 2018, reflecting the cycle of soft fiber and fabric prices in the past year and likely before merchandise that was subject to fresh tariffs hit the pipeline.
However, coming months could see prices inflated from tariffs and concurrent price increase strategies from brands angling to remain profitable.