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Low Cotton and Ocean Freight Prices Help Balance Higher Sourcing Costs

Apparel importers and exporters dealing with real and prospective increased costs from higher tariffs on goods shipped between the U.S. and China are at least catching a break from lower cotton and ocean freight prices.

Executives say the tariff situation has already raised costs around 5 percent to 10 percent due to expenditures in shifting production out of China to avoid the risk of threatened tariffs between 15 percent and 30 percent, according to Trump’s latest changes.

Teri List-Stoll, executive vice president and chief financial officer of Gap Inc., said last week that the company has “contingency plans in place…including partnering with our vendors to share in the cost, as well as pricing actions.”

The denim-centric company’s chains–Gap, Old Navy and Banana Republic–really heavily on cotton, so some price alleviation is available from the slump in cotton price that have dropped from $1 a pound to near 50 cents in the last year.

Spot prices on U.S. cotton averaged 54.76 cents per pound for the week ended Aug. 22. The was up from 54.15 cents per pound the prior week, but down from 78.73 cents a year ago earlier. On Monday, prices held steady from Friday’s close at 58 cents.

The lower cotton prices aren’t good news for farmers, which have also seen exports to China slashed during the U.S.-China trade war.

“When the possibility of lower order volumes is extended across other supply chains, it becomes evident how the trade dispute can impact the global economy and concern about escalating tariffs has been a reason forecasts for economic growth have been falling,” Cotton Incorporated said in its most recent assessment. “Slower global economic growth is associated with slower growth in mill-use, and this can be another way tariffs can affect the cotton market.

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On the logistics side, ocean freight rates have also been held down by lower demand as global trade and oil prices have weakened. Drewry’s composite World Container Index (WCI) decreased 0.2 percent to $1,453.94 for a 40-foot container or equivalent (FEU) last week, and was down 17.1 percent from compared with same period of 2018.

Freight rates from the well-travelled Shanghai to New York route fell $126, or 5 percent per FEU, to $2,159 last week. Freight rates on Shanghai to Rotterdam weakened by $87, or 5 percent, to $1,644 per FEU and freight rates from Shanghai to Los Angeles dropped $63 per FEU, a 4 percent decline to $1,393. Bucking the trend was the Shanghai to Genoa, Italy route, where rates surged $349, or 20 percent, to reach $2,099 per FEU.

The average composite index of the WCI, assessed by Drewry for year-to-date, is $1,448 per FEU, which is $16 higher than the five-year average of $1,432 per FEU. Drewry said it expects rates to remain steady this week.