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Raw Material Prices Soften Along the Supply Chain, but Tariffs Add to Uncertainty

While raw materials price increases have moderated in recent months, some areas remain elevated and the threat of volatility lingers.

Portraying the unsure and somewhat incongruous situation, Tom Caudle, principal executive officer, president and chief operating officer at Unifi, said elevated raw material costs hurt profitability in the firm’s third quarter ended March 31 and “was significantly impacted by significant pressure from imported yarns, while we also experienced raw material cost pressures in certain foreign markets. We have been forced to sacrifice margin to compete effectively.”

Looking at polyester raw materials costs, Caudle said the company began the third quarter “expecting a tick down from high levels experienced during the fourth quarter.”

“However, polyester raw material costs remained flat during the third, quarter,” he said. “While the stabilization of these costs were welcome, our guidance of a tick down did not actually occur.”

Cellulosic fiber maker Lenzing said for standard viscose, despite strong demand, oversupply still exists—which will cause even higher pressure on prices.

Caustic soda prices, used in producing its lycocell fibers, in Asia have declined significantly over the past months, but there are no signs of such a development in Europe, Lenzing said. The company noted that competitive fibers such as cotton and polyester have seen stable price levels that are expected to remain stable. Overall, Lenzing does not expect any significant changes for key raw materials that would be relevant to earnings.

Spot prices for U.S. cotton averaged 67.45 cents per pound for the week ended May 9. That was down from 71.23 cents per pound the previous week and 81.53 cents per pound a year earlier, according to the U.S. Department of Agriculture.

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A survey from the Institute for Supply Management (ISM), respondents including apparel, textile and leather goods manufacturers, had forecast an increase of 3.5 percent in prices paid during the first four months of 2019. But this month they report prices increased 1.5 percent. The 45 percent of supply chain executives who said their prices are higher now than at the end of 2018 report, reported an average increase of 4.9 percent.

When asked to predict 2019 price changes, 44 percent of respondents expect prices to increase 4.8 percent for the full year of 2019 compared to the end of 2018. Including the 39 percent who expect no change in prices, survey respondents expect a net average prices increase of 1.5 percent for all of 2019.

Asked whether tariffs such as those imposed on Chinese imports, have raised the price of the goods produced and delivered to customers, 59.1 percent of respondents said yes.

The issue of being able to pass on price increases to brands or retailers remains sensitive, but seems to be more accepted as the mindset at retail and the consumer level of price always being the priority, has eased off.

As Glenn Chamandy, president and CEO of Gildan Activewear, told analysts recently, “We don’t want to use price, if we don’t have to. Our objective is to drive manufacturing efficiencies and supply chain improvements.”

Chamandy said while “price is always a vehicle” that’s driven the company’s low-cost manufacturing, “I think that we are able to look at the prices to cover inflation, [but] the margin improvement should come from manufacturing efficiencies.”

Unifi, according to Caudle, has seen a long-term trend toward raw material cost increases and had subsequently raised its product prices. However, he said, “There is a lag effect on price increases. We’ve been behind the 8 ball, but if they stabilize, we feel we’re in a good place moving forward.”

Timothy R. Fiore, chair of the ISM Manufacturing Business Survey Committee, said, “being able to pass on raw material price increases will ultimately define manufacturing revenues and profitability.”

At the end of the supply chain, retail apparel prices fell for the second straight month in April, dropping 0.8 percent after a 1.9 percent decrease in March. The Consumer Price Index showed declines in the men’s and boys’ apparel outweighed flat levels for the cost of women’s and girls’ clothing.