Price inflation appears to have a firm grip on the apparel sector, as last year’s volatility in cotton has been replaced by soaring gas prices and related polyester costs still at peak levels.
Retail apparel prices rose 0.9 percent in January compared with December, as merchants regained some pricing power after heavy discounting during the holidays, the U.S. Labor Department’s Consumer Price Index showed. Women’s apparel prices increased 1.2 percent in the month, while men’s apparel prices rose 1.7 percent.
On a year-over-year basis, all retail apparel prices were 4.7 percent higher in January compared with January 2011, as men’s prices increased 6.3 percent and women’s prices rose 4.2 percent. At the same time, gas pump prices are breaking records in the New Year, with the highest January and February monthly averages on record. Gas prices have risen 49 cents a gallon this year to a current average of $3.79, according to the U.S. Energy Information Administration.
A report from IHS Global Insight said, “When pump prices jump, households have little choice but to pay the additional charge to fill up their tanks. Many consumers must dip into their savings, or make use of their credit cards, and spend less on more discretionary items” such as apparel.
The IHS study said, “Americans spend less than 4 percent of their personal disposable income on gasoline (3.3 percent in January), but gasoline prices tend to play a major role in defining consumer confidence and inflation expectations.” IHS said a 10 percent rise in gas prices relative to the overall Consumer Price Index historically reduces consumer confidence 1.4 to 1.5 percent, while a 10 percent fall in the relative price will increase consumer confidence by the same amount.
When cotton prices reached historic highs of more than $2 a pound last March, many in the industry turned to polyester blends as a way to control costs. But it proved to be no panacea.
Polyester production capabilities couldn’t be revved up as quickly as demand and petroleum-derived raw material costs were and continue to be at premium levels. Polyester staple has remained at historically high prices, currently selling for 87 cents a pound compared with 90.5 cents a year earlier, but still above the 77 cents a pound in February 2010.
Chemical Market Associates’ “2011 World Terephthalates & Polyester Analysis” said, “Strong economic growth in the emerging markets will drive demand for polyester products.…Increases in polyester fiber consumption will be the primary driver for [purified terephthalic acid, a main ingredient in polyester] demand growth in Asia, while in North America and Europe, PTA demand will follow [polyethylene terephthalate] or PET packaging resin growth trends. As new capacity additions are made in the polyester value chain in Asia and the Middle East, trade patterns and volumes will change, especially for PTA.”
Discussing second-quarter earnings last month, executives at Unifi Inc., a manufacturer of multifilament polyester and nylon textured yarns, said high raw material prices contributed to a net loss of $7.6 million compared with net income of $5.4 million for the same period a year earlier.
Roger Berrier, president and chief operating officer, said, “Supply issues that drove polyester raw material pricing up in the September 2011 quarter continued to impact pricing in October. Since then, raw material pricing decreased in November and December. However, the industry experts predict raw material prices to gradually increase again during February and March.”
The potential upside for the fashion industry is that last year’s volatility in cotton prices has been replaced by consistently lower prices — 85 cents a pound compared with $1.67 a year ago — which could help keep apparel prices in check, although there are still some high-priced goods in the pipeline, as well as a few serious long-term concerns.
National Cotton Council economists say the 2012 outlook for the natural fiber that accounts for about 50 percent of apparel sold in the U.S. will be influenced by China’s national reserves stocks, uncertainty over the general economy and weather developments in the Southwest.
Gary Adams, the NCC’s vice president of economics & policy analysis, told delegates at the council’s annual meeting in Fort Worth last month that 2012 is not starting out as a normal year for the U.S. Cotton Belt, particularly Texas and Oklahoma. He said drought conditions persist and, as a result, for those two states, the outlook assumes above normal abandonment and yields below trend. Adams said the NCC sees a 2012 U.S. cotton crop of 18.3 million bales, up 2.6 million bales from 2011, with 17.51 million upland bales and 783,000 extra-long staple bales. When combined with international production of 101.1 million bales, an expected 6.1 percent decline, the world crop for 2012 is estimated at 119.4 million bales, resulting in a 3.4 percent drop from the previous year.
The U.S. Department of Agriculture’s “Outlook for U.S. Agricultural Trade” report, issued on Nov. 30, forecast cotton exports to decline $600 million to $6 billion due to a smaller crop and increased foreign supply. Import demand has fallen as buyers reduce their stocks and delay purchases on the expectation of little upward price risk, the report noted.
The NCC sees 2012 world mill use of 113.8 million bales, an increase of 3.5 percent from 2011, but, Adams said, “Growth of this magnitude will only be achieved with competitive pricing and a rebuilding of the textile pipeline.” He also said that barring some major production problems, global production is projected to exceed consumption and allow world ending stocks to build to 64.1 million bales.
“While that is a level comparable to 2006-09, it is important to remember that as much as 30 percent of those stocks could be held in China’s government reserves,” Adams said. “By late January, more than 11 million bales have been purchased into the China reserve, with some speculating that total purchases could exceed 15 million bales.”
Adams said while China’s reserves policy is providing short-term support to the cotton market, its implementation of the policy “is the single largest wildcard in the cotton market.” He also noted that though the forecasted stocks-use relationship is likely to dampen upside price potential, current polyester prices and cotton’s need to remain competitive with grains are supportive of prices on the downside.
The USDA’s “Cotton: World Markets and Trade” February report said 2010-11 production in the major Southern Hemisphere exporters of Australia, Brazil and Argentina nearly doubled from levels seen just a few years ago. Record exportable supplies increased their share of world trade in cotton to 14 percent compared to a 37 percent average for the U.S.
For the 2012 marketing year, Adams said the strength of cotton demand will hinge on the global economy’s overall health and be dependent on cotton prices that are less volatile and more competitive with polyester than what was observed in 2011. He said today’s Cotlook “A” Index — a chief indicator of the level of offering prices on the international raw cotton market — of about $1 is substantially lower than year-ago levels of $1.70, with the result that international cotton area is estimated to decline by about five percent.
India, the second largest producer of cotton in the world, on Sunday reversed its ban on cotton exports six days after the policy brought protests from farmers, but the move demonstrated the volatility of supply and demand issues with the commodity.
The bottom line, according to IHS economists, is: “Even though gasoline prices have been on the rise since the latter half of December, there has been some relatively good news on other consumer and business fronts. The unemployment rate has dropped considerably in the last six months, initial claims for unemployment benefits are at the lowest level since March 2008, and the equity markets have been generally rising and have not been volatile. All of these factors have a statistically positive impact on the consumer mood that currently outweighs the recent rise in gasoline prices.”
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