U.S. Textiles 2005

Economic Outlook

By Robert S. Reichard,Economics Editor,Textile World

U.S. Textiles 2005The new year brings more positives, but pitfalls persist.Don’t write off
the United States’ still-impressive $80 billion textile industry. To be sure, the new year will
confront mill executives with a host of serious challenges and maybe even a few surprises. But, by
and large, this hard-pressed sector of the U.S. economy will survive — and maybe even rack up some
scattered gains. The one big question mark, of course, is imports. It’s anybody’s guess as to how
fast incoming Chinese shipments will grow now that the global quota system has been junked. But
there are a few positive signs. The U.S. government is finally beginning to show some meaningful
signs of keeping any further import penetration within bounds. Couple this with the fact that mills
seem to have performed a bit better in recent months, and the future isn’t quite as bleak as some
of the purveyors of gloom and doom would have us believe. A good deal of Textile World Asia’s
cautious optimism stems from the gradual shifting of mill ownership and management into stronger,
more capable hands. A case in point: the purchase of struggling Burlington Industries Inc. and Cone
Mills Corp. by Wilbur L. Ross and the merger of them into the International Textile Group (ITG).
This astute businessman obviously has not made these buying decisions out of charity. The
acquisitions suggest he is betting big on the industry’s survival. More importantly, people with
his track record usually don’t make mistakes.Another upbeat sign: the continuing development and
marketing of new and improved products. It’s hard to ignore the spate of innovations in fibers and
fabrics that have hit the market over the past year. And a lot of other introductions are scheduled
in the months ahead.The growing need for quick response plus other replacement considerations also
should help domestic producers. If nothing else, these factors certainly would seem to dictate that
U.S. firms keep a significant production base nearby – thus slowing any sudden massive shift toward
China and other Far Eastern supply sources.Demand: Equations now suggest little more than a 1- to
2-percent slippage in combined textile mill and mill product shipments. While hardly bullish and a
bit under 2004 levels, it’s considerably better than the 5.5-percent, 4.5-percent and 3-percent
dropoffs recorded during 2001, 2002 and 2003, respectively.One fairly bright spot should be singled
out: carpets and rugs. Here, TW Asia sees something close to a 1.5-percent advance — not much less
than 2004’s slightly larger 2-percent increase. Behind the better performance in this sector are
continuing strong construction and home refurnishing trends.The overall textile outlook becomes a
lot more iffy beyond the current year as new international trade patterns are established. But
assume some new governmental moves will occur that will be aimed at leveling the international
playing field; and hopefully only minor further erosion would be the result.Global Insight, a
U.S.-based economic forecasting firm, would seem to concur. Its analysts currently are predicting a
virtually flat demand pattern for basic mill products in 2006. The textile product subsector isn’t
expected to fare all that badly either, with the decline that year put at a manageable 1.5
percent.Supply: Availability will be ample or actually more than ample all the way down the line —
from basic fibers to such finished goods as apparel and home furnishings. In the United States, the
average textile facility currently is operating at only slightly above 71 percent of its potential
— virtually unchanged from the year-ago reading.More importantly, given both projected demand and
the likelihood of little significant change in capacity, this key rate shouldn’t be all that much
different by the coming summer and fall.The supply glut is even more burdensome overseas. Indeed,
there’s now growing fear among many smaller nations that they’ll lose share to expanding global
giants like China and India now that quotas have been jettisoned.Domestic inventories offer still
further evidence that there is more than enough to go around. True, the Industry’s widely monitored
stock/sales ratios are down from the top-heavy levels of recent years. Nevertheless, even at
current levels they still are sufficient to meet virtually all of today’s just-in-time ordering on
the part of users.Prices: Given the excess supplies just alluded to, it’s again going to be
difficult to boost prices. The absence of any major cost pressures also should work against the
posting of any significant increases.Downstream pressure from apparel makers also will play a
restraining role. Indeed, some actual apparel price erosion is likely as the ending of quotas opens
up the gate to a lot more cheap clothing from abroad.On this last score, the U.S.-based National
Retail Federation’s International Advisory Committee recently estimated that the demise of quotas
would knock anywhere from 8 to 18 percent off wholesale apparel costs over the next few years.What
does all this mean for U.S. textile tags? TW Asia’s own estimates, given the restraints of lower
priced apparel imports, call for only a fractional increase in basic textiles.And a pretty similar
pattern is anticipated for the textile product sector, where just a 1-percent advance is projected.
The best performance in the textile product area is likely in rugs and carpets, where continuing
good demand should permit another 1- to 2-percent price increase — not that much different from
the boost recorded over the past 12 months. On the other hand, no sizable increases are seen for
other textile products.Combined with the price restraint in basic textiles, this in turn suggests
that the overall 2005 textile price average (basic textiles plus textile products) should again lag
behind that of the general U.S. economy, which is expected to rise about 3 percent. Costs: As
suggested earlier, no major upward pressures are expected. On the fiber front, for example, any
further uptick in man-mades stemming from the energy-cost runup should be offset by easiness in
cotton, where tags have been and are likely to remain shaky. Wool, meanwhile, has been relatively
stable.And the picture is much the same when it comes to labor costs. Continuing productivity gains
in the U.S. should be sufficient to offset relatively modest mill pay hikes. Upshot: Unit labor
costs aren’t expected to rise very much. In fact, with any luck they should remain quite flat.This
lack of any significant upward pressure is also suggested by Global Insight’s forecast for material
and service costs. In the big textile product subsector, for example, the forecasting firm actually
sees a decline in dollar outlays for these materials and services.Capacity: With modernization a
survival must, the U.S. industry continues to invest in a fair amount of new, more productive
plants and equipment. This, in turn, has limited any drop-off in industry production potential,
despite continuing mill closures of older, less efficient facilities.This basically small decline
in capacity can be confirmed by taking a closer look at mill operating rates and mill production
trends. While operating rates went up only 0.5 percent, production remained relatively unchanged.
Other things being equal, this suggests that any capacity decline was minimal.Calling the turn on
this year’s capacity, however, won’t be easy, especially considering all the uncertainties that lie
ahead. Nevertheless, given past history and anecdotal evidence pointing to continuing capital
investment, it’s highly unlikely industry potential will drop all that much – at least not over the
next few quarters.Foreign Trade: It’s a brand-new ball game here. One thing is for sure — China,
which already has captured about 20 percent of U.S. textile and apparel markets, will again
increase its share.Indeed, even with the U.S. government showing some willingness to impose a few
limits on any big new surge, it’s hard to see how another double-digit increase in incoming
shipments can be avoided. At this early stage of the game, TW Asia sees the imports of textiles and
apparel on a square meters equivalent (sme) basis rising about 11 percent.Add this onto increases
of recent years, and 2005’s import total for the United States — again on an SME basis — will be
pretty much double what it was as recently as 1998.Export gains in this kind of global climate also
will be somewhat harder to come by. Combined with the expected big increase in imports, this means
another huge jump in the U.S. textile/apparel deficit. TW Asia’s red ink estimate for 2005 is put
at close to $75 billion. That compares to $70.5 billion last year and the much smaller $36 billion
figure of just a decade ago. More Thought on TradeThe above projections, however, could prove
somewhat more iffy than in recent years. Clearly, at this early date, trying to call all the
specific U.S. and Chinese moves in the quota-free world isn’t easy. To be sure, some sort of
accommodation with Far Eastern suppliers has to, and almost certainly will be, reached, but the
exact terms of that accommodation — and what it will mean for specific components of the U.S.
textile and apparel industries – is still very much anybody’s guess.The importance of China’s
impact can best be appreciated by recognizing that the Chinese share of worldwide exports has been
soaring. That share, according to the World Bank, will amount to 10.6 percent of all textiles and
47.1 percent of all clothing by the end of the year.Look at Chinese exports earmarked for the
United States, and the situation is equally disquieting. Commerce Department figures find U.S.
imports from China now top $27 billion — a 50-percent jump over 1999 imports. Not surprisingly,
some feel Chinese factories already make about 20 percent of all clothing and textiles sold in the
United States. Moreover, several U.S. mill executives now feel the figure could more than triple,
eventually leading to the capture of as much as 70 percent of the U.S. market. If correct, that
would be enough to precipitate the closing of half of today’s surviving U.S. mills.But, not
everybody is ready to agree with this gloomy assessment. Many domestic fashion executives, for
instance, feel the 70-percent figure is an exaggeration. For one, they point out there are some
restraints to putting so many of a buyer’s eggs in one basket. That’s especially true where quick
response and replacement considerations dictate that domestic firms hedge their bets and keep a
sizable base here in the Western Hemisphere.It might also be pointed out that not every gain for
China means a loss for some domestic producer. Some analysts suggest that while the Chinese share
will surely jump, some of that growth could be at the expense of other textile- and
apparel-producing countries rather than at the expense of the U.S. industry. And it makes sense —
poor countries at the bottom of the economic ladder, such as Bangladesh and Cambodia, can hardly be
expected to match China with its endless supply of workers available to feed vast numbers of
factories operating with high efficiency and low costs.In any event, there’s a growing feeling that
only the really big players such as China, India, Pakistan and Brazil — will continue to sport big
gains. Indeed, without rules restricting how much fabric and how many garments the United States
can buy from individual countries, U.S. firms will probably end up purchasing most of what they
want from five or six nations — not the 50-plus that are now part of their supply network.Summing
up, odds not only suggest U.S. textile and apparel import gains over the quarters and years ahead,
but also some really big shifts in country-by-country sourcing. Equally important are questions on
the specific steps that might be taken by both the United States and China. In the United States,
for example, an interagency government task force already is looking into a petition to consider
new quotas. And many more such petitions are anticipated in the near future.Normally, such
petitions for safeguards or limits to exports are filed after the damage is done and can be
measured. But the domestic industry has been so battered over the years that it filed these
petitions based on the threat of damage, saying it is the only way to save what is left of its
manufacturing base.Commenting on this, Allen E. Gant, chairman of the U.S.-based National Council
of Textile Organizations (NCTO), noted, ”our industry is looking for our government to approve
these petitions and prevent China from taking over virtually the entire U.S. textile and apparel
market, at the expense of U.S. jobs.”Possible Chinese ResponseMeanwhile, there has been some
movement to engage the Chinese in new actions, especially in the area of an upward revaluation of
the nation’s currency — the yuan. The current under valuation, which some put at 30 to 40 percent,
makes Chinese imports unduly cheap, thereby encouraging U.S. imports and exacerbating the balance
of trade deficit.Economists, as well as textile industry leaders, worry about this. They say the
United States’s insatiable demand for imports and its addiction to borrowing from abroad creates a
dangerous imbalance in the world economy.Following up on this, policy makers in the United States,
Europe and Japan, backed by the International Monetary Fund, are pressing China to allow the yuan
to rise in value, to help create a gentle decline in the dollar’s value.China, for its part, does
see some reasons to let the yuan rise, mainly to thwart domestic inflation. On the other hand, it
refuses to be pinned down on timing.But as noted, there are signs of change. Some high-ranking
Chinese officials have recently been hinting at shifts in thinking. While no one expects any
tremendous changes over the next year, the consensus is that by year-end, the yuan could edge up by
about 7 percent, thereby offering at least a modicum of relief to the hard-pressed U.S. textile and
apparel industries.Nor does this exhaust the list of possible Chinese responses. One other approach
could be to reduce subsidization of that nation’s textile and apparel industries. Another possible
move — have China agree to limit exports voluntarily, similarly to what happened in the 1970s when
Japan agreed to limit auto shipments.A Closer Look At CostsSome good news is coming from another
front — costs. Specifically, both of textile’s major production inputs — fibers and labor –
remain pretty much under control.Looking at the fiber picture first: Cotton tags have been running
lower than expected. Indeed, prices in recent days have been ranging anywhere from 20 to 25 cents
per pound under year-ago levels.Credit is in oversupply for these bargain-basement prices. Thus,
U.S. cotton production — despite adverse weather from last summer’s hurricanes — is estimated at
a record 21.5 million bales. That’s 18 percent above last year’s 18.3 million-bale level. Moreover,
add in impressive overseas production, and prices should not rise much, if anything, above recent
40-cents-per pound-plus levels.Man-made fiber costs – given today’s much higher petroleum feedstock
inputs — also remain surprisingly docile. Ample supply is the reason. During the upcoming year,
for example, global man-made fiber production is expected to total 87.35 billion pounds. That’s up
a significant 11.5 percent from levels prevailing as recently as 2002.True, there have been some
significant increases in polyester. But these haven’t been enough to push U.S.’ overall man-made
fiber price index up by more than 0.5 percent from year-ago levels. And nothing more than a similar
small advance in this key fiber price yardstick is anticipated for 2005.The Innovation FactorThe
industry is going all out on the technology front, introducing a spate of new and improved
products, all designed to whet buyer appetites and get a jump on the competition. It’s a
continuation of the trend started years ago with the introduction of such successful
consumer-oriented lines as wrinkle-free and stretch fabrics.Not only are these lines still being
improved upon, but they are constantly being added to by an aggressive and technically oriented
industry — one always on the lookout for new market opportunities.There are, for example, new
insect-repellent fabrics permeated with pesticides designed to protect the wearer from mosquitoes
and other pests. The pesticides are bonded tightly to fibers, which repel insects through 25
washings.Also important are today’s vastly improved outerwear products. A recent survey found that
three out of four retailers and manufacturers see technology playing a stronger role in the design
of their garments. Aside from basic fit, survey respondents singled out continuing improvements in
such fabric characteristics as warmth, breathability, odor control, washability, water repellency
and waterproofing are important. Just-on-the-market offerings also can be style-enticing, as well
as utilitarian. Such innovations as waterproof leather and denim, for example, now allow for the
introduction of brand-new high-fashion products.The washability factor also is getting a lot more
attention. Gains here have progressed, allowing for the introduction of new washable suits —
blends of polyester, wool and spandex — that can be laundered at home and look both fresh and
crisp.The growing interest in stretch fabrics also deserves some further comment. Thanks to new
advances and a shift in fashion toward slim fits, stretch is in. The addition of stretchy fibers to
men’s shirts, pants, suits and jeans adds something new and fresh to classic clothes in the same
way wrinkle-free and stain resistant finishes helped revive sales of men’s casual
pants.Conventional fabrics aren’t being ignored either. Denim makers are pumping out a bewildering
array of washes, pocket designs and styles — all designed to boost demand.Most of these
innovations start at the beginning of the production line — with improvements in the basic fibers
going into the fabric. Wool is a case in point — the fiber now is being increasingly engineered
for washability and greater comfort.In cotton, biotechnology is used to improve the fiber quality.
The aim is to provide mills a better- strength cotton with a better-length and premium
micronaire.U.S. apparel company Dockers is introducing three proprietary innovations for its pants
and shirts: a never iron cotton pant; the Thermal Adapt khaki, which helps regulate body
temperature by absorbing heat; and Perspiration Guard shirts, which prevent stains from showing.
And other companies are following suit with products that resist fading, wrinkling, staining and
shrinkage through multiple launderings.Finally, a few words on so-called smart fabrics that help
you communicate, make you feel good, and protect you — sometimes all at the same time. A few
noteworthy examples include solar-powered jackets that allow the wearer to carry portable digital
devices, microprocessor-equipped running shoes that provide intelligent cushioning, and shirts that
can monitor heart rate or calculate ultraviolet exposure.Survival StrategiesAs suggested by the
above product innovations and improvements, the U.S. textile industry isn’t about to throw in the
towel. Combine this with an impressive list of other moves already in the works and/or on the
drawing board and survival and even some scattered growth would seem assured in the years ahead.The
current strategy is perhaps best typified by Ross’ ITG, which already has facilities in China,
Mexico and the United States, as well as joint ventures in India and Turkey. The company plans to
open up a major denim mill in Guatemala to help meet demand from its Central American
customers.ITG’s goal, said Ross, is to “be the low-cost U.S. producer after allowing for debt
service; ramp up [research and development]; generate unique value-added niche products; capitalize
on brand identity; and, most important — since our customers have decided to source globally —
have a matching map.”Nor is ITG alone in feeling it can succeed in a global economy. New Balance
Athletic Shoes Inc. has remained and is prospering here in the United States, while most of its
competitors have fled to China, India and Vietnam. Some 25 percent of its shoes are assembled at
six factories in the United States.The company believes the U.S.- overseas wage gap is overblown.
All of its U.S. plants are highly automated, with barcoded parts and computerized stitching and
embroidery machines resulting in about 25 minutes of manual labor per pair of shoes versus more
than four hours in a less-automated Asian plant.This stress on better equipment is seconded by
U.S.-based Avondale Mills Inc. The company says its plants are world-class — thanks to capital
investment of more than $250 million since 1997.Another area getting a lot of attention these days
is logistics — having the right product in the right place at the right time. A growing number of
mills now embrace the concept of logistics and supply chain management as the last frontier in
further achieving corporate competitiveness. With that in mind, more than a few textile mills now
accept the idea of outsourcing their logistical needs to third-party logistics companies —
companies that specialize in arranging and managing some or all aspects of transportation and
distribution on their clients’ behalf.Also aiding and abetting these strategies is the industry’s
decision to combine all its trade groups under one roof. For the first time, said NCTO’s Gant, the
U.S. industry has come together in a unified front guaranteeing it maximum clout when pushing
issues through Congress.Finally, it might be pointed out that the United States’ partnerships with
its North American counterparts — rather than with big Far Eastern producers — still has its
advantages. Indeed, when time, speed-to-market, replenishment, inventory and cost of capital are
factored in, there is some logic to keeping a balanced amount of procurement nearby.Additionally,
industry executives point out there are other trade agreements in place that provide a financial
incentive — through lower tariffs — to source from non-Asian facilities. These include the North
American Free Trade Agreement, the African Growth and Opportunity Act and the Caribbean Basin Trade
Partnership Act.One top mill executive sums it all up: “We’re in this for the long haul. Sure, we
could see a few setbacks. But I would bet we’ll be here a decade from now — a viable firm with new
products and techniques that will further define us as a world-class producer.”
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January/February 2005