Over the past six months, the rising cost of raw materials has become an increasingly critical factor in sourcing decisions and pricing, impacted by inflation and global trade conflicts. Speaking at the Sourcing Journal Global Outlook Conference, two experts on key natural fibers gave their perspectives on the state of their markets.
Cotton prices ‘undefeated’
“Cotton prices have been extremely volatile over the past several months,” Jon Devine, senior economist for Cotton Incorporated, said. Citing New York ICE futures prices from early April, “nearby futures prices are now near $1.35 cents per pound,” he said pointing to current levels. “These are among the highest readings that we’ve seen in a decade. They are trading at levels about twice where they were prior to Covid.”
Devine noted that upward trends in any financial market are defined by a series of higher and lows and since April 2020, the upward trend in cotton prices has been “undefeated.”
The price increases evolved in two different stages, according to Devine. The first, which he described as “relatively linear,” ran from a pre-Covid low of about 55 cents per pound to values near 90 cents per pound by September 2021.
“During this time, we saw a strong correlation between the cotton market and seemingly unrelated financial markets,” the Cotton Inc. economist said. “For example, cotton futures were nearly identical to those from the S&P 500 broad index of U.S. stocks. However, this is likely not a spurious relationship. Covid represented a major macro event affecting all markets, and the stimulus that followed the [onset of the] pandemic also affected markets across the board, giving rise to what has been called the ‘everything rally.’”
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He noted that the Federal Reserve and Covid-triggered shutdowns aimed to prevent a widespread collapse in asset values. To achieve this goal, the Fed dropped interest rates near zero and embarked on a campaign of unprecedented money creation.
Additions to the money supply may help explain the linear trajectory of both cotton prices and the S&P 500 that got the market to the 90-cent-per-pound level, he said.
“The upward trend and cotton prices soon gave way to another more volatile period in price movement,” Devine said. “Sparking this phase of price movement was a surge in speculator investment.”
In late September and early October, speculators ramped up their bets that cotton prices would increase, and those bets increased 50 percent. Since then, speculative movement in and out of the cotton market has also tracked closely with changes in cotton price levels.
There are also reasons more firmly rooted in the dynamics of supply and demand, Divine said. These included a decrease in available U.S. cotton that resulted from a smaller harvest thanks to unfavorable weather and strong export demand from China in early fall.
The second stage in the cotton price spike came from strong U.S. consumer demand for apparel. For much of 2021, U.S. consumers spent 25 percent more on clothing than they did in 2019 before the pandemic, he said, versus a more typical 2 percent year-over year increase.
“So, we had very outsize growth,” Devine said. “Elsewhere, consumer demand has been weaker, with tariffs and restrictions on sourcing for the U.S. having added to desperation and willingness to pay to meet U.S. demand.”
In addition, he said the economic cycle saw the world coming out of recession that led to companies drawing down their inventories, and a subsequent uptick in demand drove scarcity. A similar phenomenon happened as the world emerged from the financial crisis in 2010-11, leading to cotton prices peeking out at levels over $2 per pound.
“Memories of 2010-2011 could have motivated some speculator investment,” he said.
This time around, however, the supply-demand situation was much different than it was 10 years ago when the world also faced a supply shortage. When Covid hit in 2020, cotton was already harvested from Northern Hemisphere producers.
“By the time the virus struck and when mills were shuttered, they could not spin that fiber,” Devine said. “Both last crop year and the current crop year … had slight production deficits…but both of those shortfalls are much lower than the surplus and the net result is that the world has more cotton in warehouses than it did before Covid. The projected volume the world will have at the end of the current crop year ranks among the Top 7 of all time.”
The reason why cotton prices potentially could be so much higher now could also have to do with the shipping crisis, he noted, as delays and difficulty getting fiber where it wants to go could be creating scarcity at the middle level, even if that fiber physically exists somewhere else. Another possible reason for some of the outside movement in cotton prices is tightness in the U.S. cotton situation.
“The U.S. is the world’s largest [cotton] exporter, so developments here can be influential on prices globally,” Devine said. “The U.S. stocks-to-use ratio dropped sharply last crop year, falling to levels near those that are the lowest experience over the past couple of decades.”
For the current 2022-2023 crop year, forecasts indicate an increase in plantings. The recent volatility in cotton prices and volatility in crops that can compete for cotton acreage “have made this an exceptionally difficult year to predict,” he said.
“On top of competing crop prices, which are up across the board, growers in the U.S. and globally have to contend with significantly higher input costs,” Devine said.
The latest rounds of price increases have also been followed by reports of mills running into resistance about passing along increases downstream, while spinners have also been reporting an accumulation of yarn inventories and some mills in China have indicated that demand has been as weak as they have witnessed since the onset of Covid, he noted.
“On top of that, inflation has become a major concern around the world,” the economist said. “The increases in energy and food costs that accompanied the outbreak of war in Europe can be expected to pinch consumer spending on discretionary goods like clothing.”
To help fight inflation, Central Banks are already preparing to end stimulus measures and will be pushed to rein in loose monetary policies more quickly than had been expected just a few months ago, he said, suggesting a slower pace of overall economic growth.
“Global economic growth is closely tied to growth in cotton demand, and cotton mill use could decline in the upcoming crop year due to some of these macro factors,” Devine said. “The evolving macroeconomic situation could compound the effects of higher prices.”
The current market suggested a small increase in acreage, and a small decrease in demand could push the world into a cotton surplus for the coming crop year, which could eventually provide some relief to volatile prices, he noted. However, much uncertainly exists, such as ongoing logistical issues and a West Texas drought.
“One way that we can help navigate that uncertainty is a look back to the futures market,” Devine added. “The market is currently predicting a steep decrease in prices…after the next harvest before the December 2022 contract. It remains to be seen whether the 20-cent-per-pound gap between July and December futures will close, but the size of that gap suggests continued volatility. The weather, macro conditions and geopolitics can all be expected to be significant market movers.”
‘Unusual’ trends in fiber prices
Johannes Stefan, commercial director, Europe, Americas & Turkey, for Lenzing, said the market for viscose, one of the company’s product lines, is currently close to its 10-year price average.
“One thing that we see is that there is quite a bit of movement into production locations outside of China, especially into Bangladesh, the ASEAN countries, with a very strong development of spinning capacity and fabric production capacity,” Stefan said. “The other one is a very strong increase in demand for preferred materials, everything from organic cotton to sustainable viscose and recycled polyester,” which has led in some cases to what he called “micro shortages.”
“Also quite unusual is that the relationship of fiber prices to each other has changed significantly,” he said. “Polyester fibers are now just a third of cotton fiber prices…also viscose is now only half the price of cotton. In many conversations we have with customers, they are also raising questions–will this lead to a shift from one fiber to another fiber?”
Lenzing’s wood pulp-based fibers Modal and Tencel have seen less of an impact from external and macroeconomic factors, with prices more stable and trending slightly downward compared to 12 months ago. Also, the investment in sustainable closed-loop production, which includes recovery and reuse of chemicals in the process, has lowered costs, Stefan said.
“Within the group of wood-based cellulosic fibers, there is one that stands out and it’s Lyocell fibers,” he added. “This is where we are growing fastest as a company, but this is also where we see a lot of industry growth with annual growth rates up to 20 to 30 percent growth added capacity.”