Cotton rally squeezes Asian apparel makers, threatens post-COVID-19 recovery

A near doubling in benchmark cotton futures prices to 11-year highs on the heels of a surge in freight and fuel prices hits Asian apparel makers as their global retail customers balk at absorb the additional costs.

Losses have piled up for garment makers in Asia, among the region’s top employers, with some smaller units suspending operations, putting thousands out of work, undermining the post-pandemic recovery and posing a new challenge for policymakers already struggling with high inflation.

To stay viable, some yarn and apparel manufacturers are even replacing cotton with cheaper synthetic fabric.

“Our factories are running at full capacity. But at what price ? We make almost no profit,” said Siddiqur Rahman, managing director of Dhaka-based Sterling Group, which supplies brands such as H&M and Gap.

The uncertain outlook for European demand amid the Russia-Ukraine war has added to the woes of garment makers in Asia – home to the world’s top garment exporters China and Bangladesh.

Bangladesh exports more than 60% of the clothes it makes to Europe, Rahman said.

In India, the world’s largest cotton producer, several small garment manufacturers are struggling to meet orders from three months ago, when cotton prices were about a third below current levels.

“Many small units have stopped taking new orders,” said Ashok Juneja, chairman of the Indian Textile Association.

Indian cotton prices more than doubled in a year after rains hit the harvest.

World prices jumped 70% in the period, hitting the highest level since 2011 in May, with analysts predicting more gains amid drought-induced damage to output from the top US exporter and a Chinese demand picks up as COVID-19 restraints ease.

In a double whammy for garment makers, “buyers are unwilling to raise prices,” said Ravi Sam, managing director of Adwaith Textiles, an Indian exporter. “They are also uncertain about summer demand, especially in Europe,” he added.

In southern India, which accounts for most of the country’s textile exports, mills decided in May to stop producing yarn and source raw cotton, the South India Spinners Association said.

The shutdowns are hard on industry workers as many were unemployed during the COVID-19 shutdowns.

“Almost 40% of the factories here have been closed because they are not financially viable,” said Duraisami, who has only one name and recently lost his job at a textile factory in the southern state of Tamil. Nadu.

Like Duraisami, thousands of people in the region lost their jobs in May, the state government said.

Cheaper polyester

Asian apparel makers, which also count Walmart and Nike among their customers, rely heavily on Europe and the United States for ready-to-wear apparel exports.

While demand rose in the first quarter as the world emerged from the pandemic, new COVID-19 restrictions in China and rising fuel prices amid the Russia-Ukraine conflict stifled it.

Shipping costs have quadrupled from pre-pandemic levels and global brands are not absorbing the additional costs, Rahman said.

“Manufacturers bear the burden,” he said.

To reduce expenses, some mills use more synthetic fibers, which can cost between $0.60 and $1 a pound compared to $1.4 for raw cotton.

“From what we’re hearing from factories in Asia, they’re increasing spinning rates in favor of polyester,” said Rogers Varner, president of Varner Brokerage in Cleveland, Mississippi.

But this exchange has limits given the contractual commitments to deliver a certain quality of fabric.

“There will be replacement…but you can’t just replace something because you don’t want to pay for it,” said Louis Barbera, partner and analyst at VLM Commodities Ltd.

Tailwinds

Costs, industry participants say, are unlikely to come down anytime soon.

Prices have risen even as lockdowns have hurt demand from China, which accounts for around a third of global cotton consumption, and will rise further as the country resumes buying, a Singapore-based dealer said. with a global trading company.

For now however, Chinese demand is weak. Textile units are sitting on stocks of yarn and fabric for nearly a month, compared to the usual 10 to 15 days, a China-based trader said.

About 400,000 tons of Xinjiang cotton is used per month, half the levels of a year ago, the trader added.

But with the end of a strict lockdown in Shanghai, China’s largest city, at 4:00 p.m. GMT on Tuesday May 31, or midnight locally, industry players are seeing demand improve.

Warm weather in Texas, which accounts for more than 40% of US production, should also support prices.

“If we don’t get… multiple rain events in West Texas, cotton prices will rise above current levels,” Barbera said.

This could eventually drive up clothing prices, adding to inflationary pressures.

“I think cotton prices are going up to the retail store. At some point, people will just decide they can’t or won’t buy,” said Keith Brown, director of commodities firm Keith Brown and Co., Georgia. – Rappler.com

Michael O. Stutler