NEW YORK — A confluence of factors — from the elimination of the quota system on Jan. 1 to production overcapacity and rising raw material prices — is creating volatility in the cost of producing fibers and pricing them.
This story first appeared in the July 13, 2004 issue of WWD. Subscribe Today.
In particular, rising oil prices in recent months have pinched the already tight margins of synthetic-fiber makers, prompting several companies to try to push through price increases. Most synthetic fibers, including polyester, nylon and spandex, are made from oil-derived chemicals.
Last week, nylon maker Honeywell increased the prices of its nylon textile products by 5 cents a pound because of the increasing costs of benzene, a petrochemical feedstock to nylon production.
“This sharp rise in the price of benzene has dramatically impacted raw material costs for nylon products,” Walter Hubbard, president of Honeywell Nylon, said in a statement. “This has forced us to reevaluate our pricing for all of our products.”
Earlier this year, several major makers of polyester filament, including Invista, Wellman and DAK Americas, raised their prices by 7 to 10 percent, citing high oil prices. Those increases took effect in February.
For the first half of 2004, the price of crude oil averaged $33.10 a barrel. This was up from an average of $27.69 for 2003 and $22.81 for 2002, according to the Illinois Oil & Gas Association.
But the upward pressure on fiber pricing may be temporary, in light of an event that is expected to pose a major downdraft for pricing throughout the supply chain. The 147 countries of the World Trade Organization on Jan. 1 are set to drop the quotas that have regulated the international trade in textiles and apparel for more than three decades, resulting in intensified competition and possible price wars.
“The entire market seems to be very uncertain [about] what 2005 and the removal of quotas will bring,” said Keith Nagy, director of filament at Celanese Acetate. “China’s on the foremost of everyone’s mind.”
In addition to being the world’s most populous nation, China is also the U.S.’s leading supplier of textiles and apparel, holding a 15.6 percent share of the import market for the year ended in April. China has a huge apparel industry and is projected to see substantial growth in its exports next year, unless the U.S. government takes action to restrain it.
The reverberations of rising fiber prices are felt at each step of the apparel supply chain through consumer prices. Typically, makers of fibers, fabrics and garments assert that they’re unable to pass all of their cost increases along to their customers, meaning further tightening of their profit margins.
Manufacturers throughout the supply chain tend to operate on tight margins, which makes raising their prices when costs grow a vital issue. The changes during the last major runup in oil, from 1999 to 2001, eventually caught the attention of the U.S. Department of Justice, which suspected that, rather than moving in step with the market, synthetic-fiber makers were working together to raise their charges, an illegal practice known as price fixing.
Last week, Wellman Inc., which makes polyester staple, said the Justice Department was trying to bring price-fixing charges against it. The company denied the allegations and said it plans to defend itself. The department has been examining fiber makers during the September 1999 to January 2001 period, when rising oil prices enticed polyester makers to raise prices. In October 2002, the probe nabbed polyester producer KoSa, a division of Koch Industries Inc., which pleaded guilty to conspiring to set prices and allocate customers with competitors.
While the elimination of quotas next year might drive apparel prices down, it is still uncertain as to how much the shift will affect textile fibers, said J. Berrye Worsham 3rd, president and chief executive of Cotton Incorporated. “Fiber demand is more a function of units than it is of dollars,” he said.
A decision by apparel manufacturers around the world to seek to increase their production substantially would lead to a rise in demand for fibers and may cause fiber prices to rise. That would be a particular concern for makers of cotton yarns and fabric, who depend on the success of farmers. A rise in demand coupled with some poor recent crop years led to a runup in cotton prices over the past 12 months.
However, prices have eased recently, as forecasts for the next crop year, which begins in August, have been strong.
“The market is anticipating that world [cotton] production will be higher than world usage by about 4 percent or so,” said Worsham.
General forecasts see world cotton production at 104 million bales, while usage is about 100 million bales, he said.
The May average price on cotton fiber delivered to Southeastern region mills was 63.99 cents per pound, down from the January average of 75.21 cents, according to the Agricultural Marketing Services unit of the U.S. Department of Agriculture. However, cotton is still at a relative high. In May 2003, a pound sold for 54.98 cents.
Looking toward future prices, Worsham said the main question would be whether next year’s cotton crop is as good as anticipated.
“The big issue is, will, in fact, the production get to that level,” said Worsham. “The market is saying ‘yes,’ but production has to rise a fairly significant amount just to get to that forecast.”
Should something unexpected happen, such as poor weather, that hurts the cotton crop, prices may show some volatility.
Cotton isn’t the only fiber for which overcapacity is looming.
“One of the most significant issues facing the textile industry is the significant overcapacity of polyester fiber globally,” said Joe Carroll, global business manager for DuPont Sorona.
Earlier this year, DuPont reduced its presence in the fiber business by selling its Invista unit to Koch Industries.
“With polyester being the least-expensive product in the marketplace, it forces all other products to compete versus this commodity, and as a result, much of the fiber capacity is nonprofitable,” Carroll said. “With China driving for self-sufficiency in polyester production, it’s leaving even more excess capacity in such countries as Taiwan that depend upon exports to China to fill up their plants.”
Fiber makers noted that high oil prices drive up their costs in many ways, not just by driving up raw material costs. They also influence the cost of running factories and transporting goods, for instance.
Bill Girrier, vice president of marketing and sales at RadiciSpandex, said that truckers have been trying to raise their prices lately as a result of the high fuel costs.
In June, independent truckers went on a wildcat strike to protest low wages and high fuel prices. Nonunionized truckers demonstrated at several ports, inhibiting the flow of goods for days.
“There’s been some labor saber rattling, if you will,” Girrier said. “That will always put a little shock on the system. Transportation is just that much more important. A lot of us have just been holding firm and refusing increases.”
The materials companies are trying to do much the same, he said.
“Stiff-arming” is how Girrier described the firm’s resistance to these efforts to ramp up prices. “We’re caught in what we call the squeeze,” he said.