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Have Sky-High Raw Materials Prices Peaked?

The unusual business patterns resulting from the global pandemic have twisted the supply and demand cycle for raw materials and their prices in new directions.

For example, Mark Messura, senior vice president of global supply chain marketing for Cotton Incorporated, told the U.S. Fashion Industry Association and American Import Shippers Association Trade & Transportation Conference this week that cotton prices continue to rise despite data indicating ample reserves in global stocks.

With U.S. spot cotton prices averaging $1.14 cents per pound for the week ended Nov. 4–the highest weekly average since the week ending July 14, 2011, when the average was $1.18–there’s little surprise that companies along the supply chain are being forced to raise prices.

The weekly average was up from $1.07 the prior week and from 65.02 cents a year earlier, according to the U.S. Department of Agriculture (USDA). Cotton Inc.’s “Monthly Economic Letter” published Wednesday noted that the December New York/ICE futures contract increased to $1.18 per pound from $1.10 over the past month.

Cotton Inc. noted that “open interest has been migrating out of the December contract ahead of its expiration and into the March contract,” which has been trading a little lower than December, with the latest values near $1.14 per pound. The A Index average of global cotton prices increased to $1.25 per pound from $1.20 in the last month.

Current USDA estimates put world stocks at 86.9 million bales and world-less-China stocks at 50.5 million bales. In terms of stocks-to-use, the global ratio is 70 percent and the figure for the world-less-China is 53.4 percent. Cotton Inc. said this contrasts sharply with the supply situation 10 years ago during the 2010-11 price spike, when global stocks were only 49.3 million bales and world-less-China stocks totaled 38.7 million. Stocks-to-use ratios in 2010-11 were 42.7 percent for the world and 45.2 percent for the world-less-China.

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“Our inventory and use levels aren’t really supporting the idea of prices at these at these current levels,” Messura said. “So, fundamentally we’re in a period where something else is going on, whether that’s investors or speculators coming in the market, or just maybe a little bit of overheating in prices. Fundamentally, there’s not a strong case to say that that world supply demand fundamentals really support this this current level of price trades.”

The Monthly Economic Letter, written by Cotton Inc. senior economist Jon Devine, said cotton prices are much lower than the peak reached in 2010-11, but the surge in prices then had a lasting effect on mill-use.

“It took seven years for global demand to recover back to the 2009-10 level of consumption,” Devine wrote. “With the shipping crisis, near-term challenges of securing product to get in front of consumers may be taking precedence, but consequences for mill-use are possible. With only a 2.3 million bale global deficit projected for the current crop year, it would only take relatively minor adjustments in production and mill-use for the world to shift into a surplus in 2022-23.”

Lenzing said in a state-of-the-market report last week that in the past few weeks, fiber prices have risen sharply. The viscose and Tencel manufacturer noted that prices for dissolving wood pulp, its main raw material, remain at a high level despite the decline in the third and at the start of the fourth quarter.

“Halfway through the third quarter, the Chinese government introduced measures to lower industrial energy consumption,” Lenzing said. “One of the sectors affected by these measures was the textile value chain, in particular spinning mills, which in turn had an adverse effect on demand for fibers.”

A significant recovery at the start of the fourth quarter pushed standard viscose prices to 14,300 yuan ($2,238.29) per ton as of Oct. 25, which was close to the high seen at the end of April. Prices for wood-based specialty fibers, which proved to be much more stable again in the past few quarters, were much less affected by these price fluctuations.

Lenzing also noted that prices on the cotton market rose 32 percent in the first nine months of the year. Compared to the previous year, cotton prices were up 58 percent. At the same time, the price for polyester staple fibers rose along with the price of crude oil and were up about 24 percent since the beginning of the calendar year and corresponds to a price increase of 40 percent compared to last year.

The synthetic fiber Producer Price Index was up 3.1 percent in September, according to U.S. Bureau of Labor Statistics (BLS). U.S.-processed yarns and threads prices were up 3.9 percent and finished fabrics prices rose 0.4 percent.

Vertical manufacturer Gildan Activewear said compared to the third quarter of 2019, its adjusted gross margin in the third quarter was up 400 basis points primarily due to “Back to Basics” cost efficiencies and lower raw material costs, while net selling prices were essentially in line with third quarter 2019 levels.

“I feel confident that our team will continue to navigate through the tight supply chain environment [and] manage inflationary pressures,” Glenn J. Chamandy, Gildan president and CEO, said on a conference call to discuss third quarter results.

Steve Bratspies, CEO of Hanesbrands, told analysts that looking into 2022, the company expects the broad-based inflation pressures to continue.

“This isn’t anything that’s unique to us,” Bratspies said. “Inflation is impacting everyone globally. We’re aware of the pressures and we’re working to mitigate the impact. This includes raising prices globally, as we know our brands have pricing power. We’re being thoughtful in our approach and keeping the consumer at the center of our decisions. Plus, we’re continuing to work on additional cost savings and efficiency initiatives.”

Harmit Singh, chief financial officer of Levi Strauss & Co., told analysts last month that the company has “taken pricing actions and believe we have pricing power to mitigate inflationary pressures.”

Further price pressures could be coming.

The Consumer Price Index (CPI) increased 0.9 percent in October on a seasonally adjusted basis, after rising 0.4 percent in September, BLS reported Wednesday. Over the past 12 months, CPI rose an unadjusted 6.2 percent, the largest 12-month increase since the period ending November 1990, marking the highest year-over-year surge in more than three decades.

Retail apparel prices were flat in October, potentially the result of pre-holiday promotional pressures balancing out higher supply chain and materials costs. Drewry’s composite World Container Index (WCI) decreased 4.9 percent to $9,195.41 per 40-foot container or equivalent unit (FEU) for the week ended Nov. 4, but remained 252 percent higher than a year earlier.

The average composite index of the WCI year-to-date was $7,293 per FEU, which was $4,701 higher than the five-year average of $2,592 per FEU.