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

  • Losses rise at garment makers, small units suspend work
  • Smaller garment makers struggle to fulfill orders in India
  • Some are replacing expensive cotton with cheaper synthetic fabric
  • Cotton prices expected to rise further as Chinese demand picks up
  • Crop-damaging hot weather in Texas pushes prices up

MUMBAI/DHAKA, June 2 (Reuters) – A near doubling in benchmark cotton futures to 11-year highs on the heels of a spike in freight and fuel prices is hitting manufacturers of Asian apparel as their global retail customers are hesitant to soak up the extra charges.

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, jeopardizing post-pandemic recovery and posing a new challenge for policymakers already struggling with high inflation. Read more

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

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“Our factories are running at full capacity. But at what cost? We are making virtually no profit,” said Siddiqur Rahman, chief executive of Dhaka-based Sterling Group, which supplies brands such as H&M (HMb.ST) and Gap. Inc. (GPS.N).

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.

World cotton prices hit multi-year highs after weather conditions undermine crops from major producers

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. Read more

The shutdowns are hard on industry workers as many were unemployed during the COVID 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 Inc (WMT.N) and Nike (NKE.N) among their customers, rely heavily on Europe and the United States for ready-to-wear exports.

Main world producers and exporters of cotton

While demand rose in the first quarter as the world emerged from the pandemic, new COVID 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 replacements…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.

BACKWINDS

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 nearly a month’s worth of yarn and fabric inventories, down from 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, or midnight locally, industry players are seeing demand improving. Read more

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

“If we don’t get…multiple rains 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 go up to the retail store. At some point people will just decide they can’t or don’t want to buy,” said Keith Brown, product company manager of base Keith Brown and Co, Georgia.

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Reporting by Rajendra Jadhav in Mumbai, Ruma Paul in Dhaka, Ashitha Shivaprasad in Bengaluru; Additional reporting by Hallie Gu in Beijing and Sudarshan Varadhan in New Delhi; Editing by Himani Sarkar

Our standards: The Thomson Reuters Trust Principles.

Michael O. Stutler