Cotton Price Volatility Plagues Apparel Market with Uncertainty

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Cotton Price Volatility Plagues Apparel Market with Uncertainty

By Manik Mehta - 03/23/2011
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While the apparel industry is clinging to cautious optimism over the economic recovery in major global markets, including the U.S., many are deeply concerned over the rising prices of cotton, caused by growing demand, mainly in countries such as China and India, and limited supply of the commodity from India. 

Pakistani textile and apparel manufacturers also faced an acute shortage of cotton caused by floods that devastated much of the country’s cotton crop. Pakistani buyers scrambled to neighboring India to meet the deficit in cotton supply, though not with great success. 

“Cotton prices are at a high right now. A few years ago, we had a situation where cotton demand had recovered but supplies did not increase,” Gary Adams, vice president of economics and policy analysis at the National Cotton Council, told Apparel. 

Expect cotton supply and demand to be uneven

According to Adams, cotton production in the U.S. totaled some 18 million bales in 2010, rising from 12 million bales in 2009. Total global cotton production was around 115 million bales, with the four top producers, in order, China, India, the United States and Pakistan.

But cotton has experienced its share of troubles recently. In addition to floods in Pakistan and Australia, India — the world’s second largest supplier by quantity and the largest by value — has been imposing restrictions on cotton fiber and yarn exports. Meanwhile, the recent upheaval in Egypt (15th largest supplier of cotton), with possible impact on its cotton cultivation and supply, was also cause for concern to some buyers who heavily depend on Egyptian cotton. Although Adams predicted that this would not have a significant impact on that country’s supply capability, textile and apparel products that are made with Egyptian cotton will cost more in U.S. stores this spring, and many experts predict that the upheaval in the region (also putting pressure on oil prices) will result in higher clothing prices in the coming months.

Adams expects cotton supply and demand this year to remain uneven. While anticipating that some 14 percent more cotton will be planted in cotton-growing areas, he notes that cotton faces competition from crops such as grains and oilseeds, whose rising prices are making their cultivation attractive. Still, countries such as Uzbekistan and South Africa are expected to increase their cotton production, and Adams anticipates global production to rise by 8 million bales to 123 million bales.

While a tight overall cotton supply-and-demand situation in 2011 will keep prices high, Adams questions whether or not the demand for cotton can be sustained under present market conditions characterized by uncertainty regarding the economic recovery. Much of the global cotton demand, he says, will be driven by strong demand from the growing middle classes in the world’s two biggest emerging markets, India and China.

Who will be affected

Based on an analysis of the impact of rising cotton prices on apparel prices conducted by Cotton Incorporated, retailers at the lower end of the price spectrum are more likely to be affected by changes in raw fiber prices due to smaller margins, whereas high-end stores are in a better position to absorb these temporary increases, says Kim Kitchings, senior director, corporate strategy and program metrics, at Cotton Incorporated.

Certain categories of apparel face potential cost increases, although the impact will differ from product to product and depend on the weight of cotton used in a garment. The cost impact, for example, will be greater for a pair of jeans because of its heavier weight and, consequently, the larger amount of cotton used in the item. 

Kitchings cited a number of reasons for the current shortage of cotton: world mill consumption has exceeded cotton production in the past four years; farmers chose to plant crops that were paying higher prices, including soybeans and corn; and floods in Pakistan devastated that country’s domestic market, although the global impact of this was somewhat limited because Pakistan accounts for only 10 percent of world cotton production.

Because global demand exceeds supply and prices have increased, Kitchings surmised that some farmers will return to cotton production, which should help ease the gap between world production and consumption. Some cotton experts at the recent Heimtextil 2011 tradeshow in Frankfurt also noted that rising prices of cotton were prompting U.S. farmers to plant more cotton this year.

One Asian cotton buyer, familiar with the U.S. cotton trade, said that California’s cotton-growing farmers were expected to cultivate some 400,000 acres of cotton in 2011, up from 200,000 acres in 2008.    

India restricting cotton exports?

Some Pakistani home-textile manufacturers at the Heimtextil show, facing a shortage of domestic cotton, voiced concern that the Indian government had imposed restrictions on cotton exports. A representative of the Pakistan Yarn Merchants’ Association claimed that this restrictive policy had inflicted “more than $8 billion in losses” on the industry because Pakistani companies could not get their hands on the cotton they needed, though many Indian businesspeople at the Frankfurt fair dismissed this claim as “unfounded and highly exaggerated.”

The All Pakistan Textile Mills Association (APTMA) has already urged the Pakistani government to arrange for imports of Indian cotton that was purchased by Pakistani mills at the beginning of the season at prices of approximately $0.90 per pound. 

According to some manufacturers at the show, cotton importers in Pakistan, China, Bangladesh and Vietnam prefer Indian cotton; it is considered to be of good quality and it is also less expensive than U.S. cotton, thanks to its lower freight and other overhead costs.

Shortages in Pakistan

Altaf Gul Mohammad, general manager, operations, of Yunus Textile Mills in Karachi, Pakistan, said that Pakistan’s textile industry faced a cotton deficit, with Pakistan’s cotton production down by 10 percent to 15 percent because of the heavy floods. “Pakistan is trying to offset the shortage by buying cotton from India. Pakistan would gain immensely if its ties with India improved and exports of cotton are allowed,” he told Apparel.

Orient Textile Mills, also based in Karachi, with a 2.5-million-meter monthly production capacity and a $55 million turnover projection for 2011, also faced cotton supply problems. “Pakistan does not grow enough cotton for its own consumption now. It needs some 15 million bales as against 12 million currently,” explained Iqbal Ebrahim, the company’s CEO, in an interview at the Heimtextil show.

“India is not exporting enough cotton. It has decided to slash its cotton exports to its global buyers, including Pakistan. Cotton supply [shortages] will become acute in the next three months but will ease later,” Ebrahim predicted.

“Because of rising cotton and polyester prices, it has become tough for the retail industry to sell. As a manufacturer, we would like to see some stability in costs,” said Taufique Sayeed Saigol, managing director of Kohinoor Textile Mills, adding that increased domestic demand from China, India and Brazil has increased overall demand for cotton, while the recent restrictions on India’s cotton exports have negatively affected production.

“India does not have transparency in its policy governing cotton exports. Pakistan would like to buy Indian cotton because it is of good quality and it enables Pakistani importers to save on higher freight charges which would be incurred if they purchased from the United States or elsewhere,” he said.

India addresses domestic demand

But India has its own needs. Although it is the world’s second largest supplier in terms of quantity and the largest in terms of value, India faces rising domestic demand, according to Sidhartha Rajagopal, executive director of the Mumbai-based Cotton Textiles Export Promotion Council.

According to Rajagopal, India’s total cotton production was estimated around 22 million bales while it exported 8 million bales in 2010. Much of the cotton was used for domestic consumption by local processors. 

“The prices of cotton and yarn have surged in recent times for a variety of reasons. Contrary to what Pakistani cotton importers are saying, India pursues a policy of calibration and not protectionism of its domestic textile industry. We have a policy of social responsibility by which we mean that we have an obligation toward our weavers as well,” he explained.

Manik Mehta is a freelance writer based in New York.

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