China Adjusts To “Zero Inflation” In Textiles

PXPTA3

By John Richardson

CHINA’S polyester chain business is undergoing a painful adjustment period, as the slide above indicates, as a result of:

  • Expectations that cotton prices will drop to a five-year low in 2014-2015. This is largely the result of China’s decision to directly support farm incomes, rather than buying-up ever more cotton stocks. Cotton and polyester are substituted for each other based on cost.
  • The end of the “wealth effect”. It was the wealth effect of rising property and other asset values, resulting from China’s credit boom, that was at the heart of the surge in chemicals and polymer demand between 2009 and 2013. If we remove this effect, as is happening today, we are left with a country where average per capita urban income levels were just $4,769 in 2013, according to the Chinese government’s National Bureau of Statistics (NBS). In rural areas, the NBS number for 2013 was only $1,276.  Take away the temporary sugar high of the credit surge and you are left with a country that cannot afford as many new cars, washing machines, TVs – and perhaps even cheap polyester shirts – as some people have estimated.
  • Rising labour costs as a result of China’s tremendous economic growth and its one-child policy. Labour costs are, of course, critical in textiles and garments manufacturing.
  • Huge capacity additions that were planned without taking all of these factors into account. China has, for instance, added 30 million tonnes/year of polyester fibre capacity since 2000, according to ICIS Consulting.

The good news is that China’s textiles and garments industry is already starting to adapt through outsourcing to other Asian countries such as Cambodia and Vietnam and, remarkably, even to the US. Zhejiang province-based Keer Group plans to invest $128 million in building a cotton yarn plant in South Carolina.

We are a also constantly reminded that we need to our realism “in proportion”.

Here goes, therefore:

  • Seventy two per cent chief purchasing officers questioned by McKinsey & Co in 2013 said that China would remain their most important location for sourcing textiles and garments.
  • Despite a significant shift of production to other cheaper countries, Adidas still manufactures 40% of its training shoes etc. in mainland China.
  • China’s supply-chain efficiencies – including ever-greater back integration to captive production of its own polyester fibre, purified terephthalic (PTA) and paraxylene (PX) raw materials – further strengthen its position.

But keeping this in proportion also involves recognising that the “race to the bottom” in textiles and garment costs will continue because of another negative “wealth effect: Ageing populations in the West.

“We can forget about inflation in the garment sector for decades,”  said Alan Tonelson, research fellow at the US Business and Industry Council in this Bloomberg article, because of the constant search for cheaper manufacturing locations.

The “hollowed out” US middle class is increasingly using online bargain hunting as a way of keeping their costs down, added the same Bloomberg article.

Meanwhile, China continues to add more capacity up and down the polyester chain. By the end of 2014, for instance. an additional 4.95 million tonnes/year of new PTA capacity is expected to come on-stream in China, according to ICIS data.

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