U.S. Textile Industry Forecast 2003

Economic Outlook

By Robert S. Reichard,Economics EditorU.S. Textile Industry Forecast 2003The U.S. textile
industry is alive and well. That’s not to say there still aren’t some serious problems and question
marks. The point is: textiles remains a viable, innovative and forward-looking industry, one that’s
likely to edge back into the plus column after five years of decline.Growing emphasis on new
fabrics and stylings should help, by keeping consumers in a spending mode. So should an economy
which, while still far from robust, is expected to grow at a respectable 2.5 to 3 percent annual
rate over the coming year.Nor do costs seem to present any insurmountable problems. To be sure,
there should be some small advances in fiber costs, but ample supply will keep such boosts in
bounds. Combine this with solid productivity gains that should pretty much offset relatively modest
payroll hikes, and overall cost pressures seem quite manageable.Assuming no big new curveballs,
here’s a more detailed look at what Textile World Asia editors see ahead for the still quite
impressive, close-to-$80 billion U.S. mill and mill product industries.2003 Demand: A slow
turnaround will finally push mill shipments (yarns, fabrics, finishings and others) back into the
plus column — with dollar totals expected to advance about 1.5 percent. A slightly larger 2-percent
gain is seen for mill products, including automotive, carpets and home furnishings.Inventories: The
news is good here. Pipeline holdings have dropped significantly over the past year — especially in
the mill area, though to a lesser extent for textile products. With these stocks down at near
minimum levels, any further declines in key inventory/sales ratios are likely to be quite
small.This, in turn, suggests that new orders will be met more and more by new production rather
than by drawing down existing stocks. And that’s a key reason, in addition to improving final
demand, why mill and mill product output should be sporting increases over the upcoming
months.Prices: Increases, as suggested earlier, will be relatively scattered and generally on the
small side. Behind the sluggishness here is a combination of still-high capacity, strong import
competition, downstream pressures from both apparel makers and consumers, and only limited upside
cost increases.At most, only about a 1-percent increase in overall price averages is anticipated —
not enough to keep these tabs close to 2 percent under the peaks hit back in the 1996 to 1998
period. On the other hand, this projected textile performance doesn’t compare all that badly with
the overall U.S. producer goods average, where hikes are expected to be only in the 1- to 2-percent
range over the upcoming year.Foreign trade: The past year was somewhat of a disappointment, as
estimated imports on a square meters equivalent basis rose by a rather impressive 7 percent. That’s
in marked contrast to the nearly unchanged rate of 2001. Another fairly strong gain is seen for
2003 — probably something in the order of 5 to 6 percent.

 Exports are not likely to provide much of an offset, as lackluster overseas growth
rates slow the demand for U.S.-made products. As of now, for example, it’s hard to see much more
than a small 1-percent or so export advance. The result: a further increase in our already huge
textile and apparel trade deficit to more than $63 billion. That’s double the levels prevailing
just a decade ago.Industry capacity: Disappointing demand has, not surprisingly, forced some
industry contraction. How much shrinkage? Compare a 3-plus percent increase in capacity utilization
last year with only a small 2-percent increase in output, and it suggests a 2-percent decline in
capacity or production potential.This trend should continue with further modest drops in available
capacity. Combine this with another small demand gain, and operating rates should move up another
two percentage points to near the 78.5 mark. While this is still some 12 to 13 percentage points
under the 1994 high, it does point to progress — albeit slow — toward a better supply-demand
balance.Beyond 2003: Looking beyond the current year becomes a little more uncertain — particularly
as 2005, when all import quotas are eliminated, approaches. But at this stage of the game, the
prognosis remains moderately encouraging.To be sure, the output losses of recent years will never
be recouped as we continue to move into a single global market. On the other hand, all the steps
taken and in the process of being taken do seem to assure a viable, though smaller, industry.Global
Insight, for example, sees mills holding their own or maybe even eking out fractional gains through
the foreseeable future — enough to push gross operating profits up to $15 billion by the end of the
current decade — some 15 percent above this year’s estimated level. Uncle Sam’s analysts would seem
to agree. Indeed, they’re even more optimistic. More to the point: a recent Bureau of Labor
Statistics (BLS) projection calls for average annual textile output increases of 1 percent over the
2000-2010 period.And if you zero in on some of the subsectors, the BLS outlook is even rosier.
Knitting mill output over the decade, for example, is expected to be up 1.7 percent annually.
Carpets, meantime, are targeted to grow at an almost-as-encouraging 1.3-percent annual pace.New
Products, ProcessesMuch of this longer-term optimism is based on the ever-growing number of new
offerings that will be hitting the market in the years ahead. Indeed, this is something that has
already been bearing fruit — with innovative new fibers and fabrics even now buoying demand in many
different areas.One of the most successful of these has been the positive consumer response to the
introduction of wrinkle-free fabrics for shirts. And this is something that’s still being worked
on. Witness, for example, new fabrics that are chemically treated to prevent the puckering of
pockets, cuffs and plackets.But that’s only the tip of the iceberg. Coming off the drawing board
are finer-micron wools, improved yarns, and more colors and patterns — all designed to spur demand.
Equally significant are creative new blends, as well as older ones with unique new looks, including
more washable, water-resistant and soft-stretch offerings.Some of the biggest firms are at the
forefront of these moves. DuPont, Wilmington, Del., recently announced a commitment to introduce 25
new fiber products within the next five years — with five of these targeted for the current
year.The company also has teamed up with Levi Strauss to produce Lycra®-blend jeans. DuPont also is
working on clothes that can be detected by global positioning satellites.In another area, Celanese
Acetate, Charlotte, and KoSa, Houston, are working together to develop fabrics made with stretch
polyester in the fill and acetate in the warp. Included will be many sateens, twills and plain
weaves. Then there’s Nano-Tex LLC, Greensboro (51-percent-owned by Burlington Industries), which
has launched a chemical process that adds “nanowhiskers” to fabrics, rendering them wrinkle- and
stain-resistant. The company also has developed activewear fabrics that disperse and dry sweat.
Last, but not least, there are “way out” materials that incorporate battery-operated heat panels
and small control units that let the wearer warm up or cool down the garment. There are also new
thermal insulations that automatically store and release heat in response to skin temperatures.To
be sure, not all of the above developments will be blockbusters. But they all emphasize the
industry’s new approach — one designed to improve offerings and thereby strengthen bottom-line
performance.Productivity And Employment TrendsAll the innovations and breakthroughs just alluded
to, however, are just one part of today’s industry survival strategy. Equally important is the need
to continually beef up efficiency.And here, too, mills seem to be racking up a pretty impressive
record. Output per textile worker has jumped close to 36 percent over the past 10 years — the
equivalent of a 3-percent compounded annual rate of increase.And there’s every indication this rate
of gain will continue. This magazine’s predictions, for example, put the 2003 gain at near 3
percent. Go beyond the current year, and the prognosis is equally upbeat. Specifically, the
previously alluded to 1-percent annual gain in output projected by BLS analysts over the current
decade is accompanied by predictions of further declines in textile employment.Indeed, compare the
employment slippage with the increase in production, and you end up with something approaching
4-percent annual increases in worker efficiency over the 2000-2010 period. That’s equal to or even
better than the all U.S. industry average.Factors behind this continuing productivity trend aren’t
too hard to find. Still impressive, albeit somewhat diminished, spending on new, more sophisticated
plants and equipment can’t be underestimated. Not only does this cut costs, but it also helps put
mills on the cutting edge, allowing for the production of new high-tech engineered fabrics —
products that were virtually unheard of a few short years ago.More savvy use of capital spending
dollars may also be playing a role in efficiency gains. Mill men are taking a much more hard-headed
approach to investment outlays. With capital spending budgets tight, they’re concentrating on
squeezing even more out of the investments they’ve already made. In a sense, the emphasis is on
spending better rather than spending more. What it all boils down to is a smaller, leaner and more
efficient operation. It’s a “must” strategy, as both the textile and apparel sectors move to stay
viable in today’s rapidly changing business climate.Import And Export TrendsTrade is another area
undergoing constant change. Behind all this: a volatile and still somewhat uncertain world market,
in which ground rules remain as “iffy” as ever.Some of the big issues now are: new exchange rate
changes and their effect on prices; ability to open foreign markets to U.S. textile exports; U.S.
mill ability to integrate production and sales in a one-world market; and stricter enforcement of
trade laws.Further out into the future, there is the uncertainty of what happens two years from
now, when virtually all quotas are eliminated for World Trade Organization (WTO) countries. Of
particular concern is the potential influx of still more Chinese exports.This latter point is
clearly something to watch. Not only is China capable of flooding the world with low-cost textiles
and apparel, but that nation also could be a problem in high-end products, too, as Chinese
expertise and management sophistication approaches or even tops that of other world producers.Then
there’s the move towards a Free Trade Area of the Americas (FTAA). Also targeted for 2005, it would
call for the eventual elimination of tariffs and non-tariff barriers among countries in the Western
Hemisphere.Coming back to the nearer term, the new year’s import total of textiles and apparel on a
square-meter-equivalent basis is almost sure to show another gain. True, there won’t be a
resumption of the double-digit gains reported over the 1997 to 2000 period. But it’s hard to see
how another meaningful advance to more than 37 billion square meters can be avoided.The new Trade
Act passed in 2002 also will bear close watching. Among other things, it increases the potential
for duty-free apparel made from African fabric and yarn, knit apparel made from Caribbean fabric
and imports from the Andean nations. Nor can any meaningful import offset be expected on the U.S.
export side, as lackluster overseas economies dampen overseas demand for U.S. fabrics and garments.
In any case, combine this disappointing export demand with still-rising imports, and a further
increase in the already huge textile and apparel trade deficit seems virtually unavoidable.On a
more upbeat trade note, textiles should continue to fare better than apparel over the coming years,
as domestic mills increasingly send fabrics to overseas locations for cut-and-sew operations — and
then send the finished garments back to U.S. retailers for sale.

 Costs Stay Under ControlThe overall cost prognosis isn’t all that bad either. To be
sure, over recent months there has been some creep-up in cotton fibers into the 45-plus cent range.
But that’s a far cry from the peaks of just a few years back.True, the new year could see some
fractional further advances for the natural fiber. But they won’t be catastrophic, as a good U.S.
2002 to 2003 crop combined with another fairly large world crop assures an adequate or even
more-than-adequate supply.One demand question mark, however, is the extent of new Chinese buying.
There’s some talk that the big Far Eastern cotton consumer may initiate some substantial purchasing
later on in the year.Man-made fiber tags also are expected to remain within bounds. One reason is
this past year’s big jump in global capacity. World potential at last report, for example, was put
at 12.8 billion pounds. That’s a big 24-percent jump over year-earlier estimates. Given this
capacity overhang, this magazine forecasts call for only about a 2-percent price increase over the
new year. That’s not nearly enough to bring these quotes back up to the peaks prevailing in the
late 1990s.But there’s a caveat here. These price estimates might have to be raised despite today’s
global capacity glut. It all centers around petroleum feedstocks for these fibers. Should Middle
East problems spark an oil price spike, then there could be repercussions both on petrochemicals
and, ultimately, on man-made fiber tags.Meantime, the outlook for the other big textile cost area —
labor — remains fairly upbeat. Forecasts calling for continuing pay restraint can be made with more
than a fair amount of confidence. And, as detailed earlier, the combination of only modest payroll
increases combined with strong productivity gains would seem to pretty much guarantee little or no
upward pressure on unit labor costs.New Global Insight forecasts suggest that this labor and fiber
cost restraint will continue through the remainder of the decade. The consulting firm’s predictions
call for overall input costs of the industry to advance only about 1 percent per year on average
through this extended period.

 A Blueprint For The FutureBut not everything will be coming up roses. True, the textile
industry will most certainly survive and even prosper, but it will take a lot of imagination and
effort. Put another way: the key to survival in today’s competitive marketplace — flexibility,
innovation, cooperation and globalization — will be more important than ever.All this, in turn,
will imply increasing attention to such critical areas as cycle time; communications with both
suppliers and customers; quality control; inventory management; and product differentiation,
including the development of niche markets.Differentiation and new product developments are now
pretty much industry “musts.” They’re the kind of approaches that not only beef up the demand
curve, but also point the way out of today’s price-cutting morass.And these ideas can work with
basic established fabrics, as well as with brand-new ones. Take, for example, denim, where
constructions with unique washes, as well as more interesting fashions, are not only moving well,
but are showing more resistance to downward buyer price pressures.No matter how low U.S. commodity
textile prices go, they’ll still be higher than those quoted in Asia and other areas of the
developing world. As one fiber executive observes, “It’s suicide today to place all your eggs in
the commodity basket. The more you differentiate, the better off you’re likely to be.”The
Congressional Textile Caucus could play a major role in leveling the international trade playing
field. The group is expected to concentrate in such key areas as the speed of textile quota
removal, illegal transshipments, global market access and assistance to displaced domestic textile
workers. But perhaps the most significant need in today’s competitive climate is for more
cooperation among firms operating up and down the textile and apparel production and distribution
lines. Upstream, for example, there’s clearly a need for more communication and planning between
mills and fiber makers. Not only should this include increased mill dependence on fiber companies
for development work, but also closer liaison between the two to come up with new fabrics, blends
and variations.Traveling further downstream, there’s the inevitable trend toward more and more
global cooperation and control, all the way down to finished garments and other products.There are
endless variations on how all this can be accomplished. One Burlington executive describes how his
company has in a very real sense reinvented itself. He details how the firm — by supplying both the
management and technical expertise, but not the ownership — will be masterminding a global network
of fabric and apparel operations.In any case, textiles have become a whole new ball game. As still
another top mill executive sums it all up: the only strategy for survival is supply chain
management — with the ultimate goal of delivering the right products at the right time and at the
right price to both retailers and the ultimate U.S. consumer.

Spring 2003