U.S. Textiles 2004

New year brings positives, but pitfalls persist.By Robert S. Reichard, Economics Editor, Textile World

Economic Outlook
By Robert S. Reichard,Economics EditorTextile World Magazine

U.S. Textiles 2004For the United States, the new year may bring more positives, but pitfalls persist.Don’t bet the ranch on it, but the biggest decline in U.S. textile/apparel history may be slowing down. Indeed, if all goes well — and no new international crisis throws a monkey wrench into things — the new year could mark a turning point for hard-pressed textile and textile product mills in the United States.To be sure, further modest shrinkage seems unavoidable. But, as the year wears on, the overall picture should begin to brighten — with perhaps even some fractional gains in a few select areas by late 2004 or early the following year.Though the U.S. textile industry continues to face global competition that will intensify with the ending of quotas in 2005, the situation has to be weighed against a growing number of offsetting upbeat factors. These include ongoing mill reorganizations and consolidations, as well as the improved production and marketing steps currently being taken by an increasingly savvy industry.Clearly, the shuttering of older inefficient mills, continuing plant and equipment spending, solid productivity gains, and a more globally oriented approach should begin to pay off. All should help make for a leaner, meaner industry — one more likely to survive in today’s hotly competitive marketplace.Costs, meantime, should remain in manageable bounds. True, raw cotton may cost a bit more. But most manmade fibers are likely to remain steady, or at worst inch up fractionally.Aiding and abetting sales will be the ongoing introduction of innovative new and improved products that look better, wear better, feel better, provide more protective features and are more stylish.Finally, there’s today’s improving business climate — most analysts now predict solid 3- to 4-percent annual rates of gain this year. These kinds of advances almost surely will translate into increased consumer demand for both textile and apparel products. In short, there’s precious little to indicate the demise of domestic activity. Combined textile mill and mill product shipments managed to reach about the $73.5 billion mark in 2003. By and large, if the industry plays its cards right, the next few years aren’t likely to turn out all that badly.DemandBasic textile mill shipments (yarns, spinning, texturing, throwing, twisting and all types of fabrics and finishings), which declined a hefty 35 percent since the late 1990s (to only $39 billion at last report) are likely to fall only fractionally in 2004. Credit the likely bottoming out to somewhat larger apparel purchases (the first increase in purchases in seven years), as an improving economy loosens consumer purse strings.Meantime, mill product shipments (carpets, rugs, curtains, other home furnishings, canvas, tire cord and fiber, and textile bags) — which have managed to remain in the plus column (though just barely) over the past few years — should rack up another small gain. Best bet here: close to a $35 billion shipment year — a bit more than 1 percent above estimated 2003 levels. SupplyNo sweat here, judging from the combination of still-increasing imports and more-than-ample U.S. capacity. On the latter score, the textile mill operating rate is currently pegged at around the 70-percent mark — with perhaps a fractional rise possible over the new year. Even so, that’s a far cry from the near-90-percent reading reported in the early and mid-1990s.Relatively high inventories also point to adequate or even excess supplies. Textile mills, at last report, had a close-to-1.5-months’ supply of goods on hand. While down a bit from early 2003 peaks, that’s still considerably above the 1.4-month low hit during 1997 (the last good textile year). Nor are any major fiber problems anticipated. To be sure, cotton and wool supplies are down a bit — but not to where they’re likely to precipitate any major dislocations. As for man-mades, heavy capacity overhands — both here and overseas — continue to weigh down the market.PricesAny increase this year will be scattered and quite modest, with the overall advance remaining well under the general inflation rate. Factors behind all this price restraint would have to include a combination of foreign competition, excess capacity and downstream apparel/retail pressures.But there could be a few exceptions to the overall softeners. Cotton, for one, could see some added firming as global supplies tighten. Rugs and carpets should also edge higher — aided by another good construction and renovation year. And this would be on top of this past year’s 2-percent average advance. Strength is also seen for some of the newer specialty fibers and fabrics, where product differentiation dampens the general competitive effect. CostsFiber expenses look to remain under control — aside from the justnoted creep-up in cotton. Labor rates, meantime, aren’t likely to advance by more than the 3 percent-or-so increase of the past year. But with a similar 3-percent increase anticipated for productivity, overall mill unit labor costs should again remain relatively flat.Global Insight, an economic forecasting firm, also backs up the feeling that costs will remain under control. The company’s analysts, for example, expect overall labor outlays for textile mill products to decline in each of the next few years. The firm is equally upbeat about material and service costs, which are also forecast to edge down a bit.CapacityIndustrial potential, meantime, hasn’t really dropped by all that much. This can be inferred from the fact that this past year’s 5-percentage- point drop in the textile utilization rate would never have occurred if capacity reduction had kept pace with reduced industry production.To be sure, spinning capacity has dropped — with declines over the past 12 months noted for ring spindles, open-end rotors and air-jet positions. But given recent sharp declines in output, there seems to be more than enough spinning capacity to go around.Reports of fairly substantial purchases of new equipment also would seem to support the feeling that overall capacity remains ample or even more than ample. So would rising productivity — for, other things being equal, mill efficiency depends in large extent on the increasing number of new and faster machines coming on-line.ProfitsDespite today’s rough times, the industry has managed to remain in the black — at least as far as overall averages are concerned. True, this past year’s estimated less-than-$200 million after-tax earnings total is pretty anemic, especially when compared to the $2 billion levels of 1997 and 1998. But it does suggest U.S. mills have the ability to ride out the current storm — thanks to improved management strategies, overseas sourcing and stillincreasing productivity and innovation.Looking ahead, it would be unrealistic to expect any significant improvement — at least not over the next 12 months. On the other hand, the bottoming out in demand envisioned for 2004 (combined with continued efforts to keep costs under control) should allow for some fractional advances in some sectors — enough to bring the after-tax overall profit level to more than $300 million.The same pattern also is expected for margins (profits per dollar of sales and profits as a percent of stockholders’ equity). They’ll remain very low, but begin to inch up — probably sometime after mid-year.Foreign TradeFurther import increases are unavoidable, though the 2004 gain (expected to be something in the order of 6 to 8 percent on a square meters equivalent [sme] basis) could fall a bit shy of this past year’s 11- percent-plus spurt.Exports also should inch ahead — not so much because there’s all that much progress on toppling overseas barriers, but rather because the global economy will be increasing faster than in 2003. And that, other things being equal, should raise foreign demand for U.S. textile products.But these export gains won’t be enough to reduce the dollar gap in the U.S. textile and apparel trade deficit. Indeed, it looks like another 5- to 6-percent increase in the redink balance — enough to push the total trade deficit to nearly $74 billion. That would be more than double the figure prevailing as recently as 1996. A Closer Look At Imports/ExportsA good deal of the import surge can, of course, be traced to China, whose shipments to the United States have nearly doubled year-earlier totals. The Chinese increase over the past 12 months represents more than two-thirds of the total U.S. import advance over the period.More importantly, these gains have established China as the number- one supplier to the United States — replacing Mexico, whose incoming shipments have actually declined.Also worth noting: The World Bank estimates that once all quotas are lifted in 2005, China’s piece of the United States’ $60 billion in apparel and textile imports could rise from the current $6.5 billion level to nearly $40 billion by 2010.To be sure, the United States has already taken some corrective action by imposing a 7.5-percent cap on annual growth of knit fabrics, bras and dressing gowns. But it’s only a small step because this will restrict the growth rate on only 4.7 percent of China’s textile and apparel exports to the United States.Although there is growing pressure in the U.S. calling on China to revalue its currency to curb the surge of low-cost imports into the United States, but little in the way of major change is likely — partly because this could create an international financial crisis and partly because China needs these exports to offset trade deficits in other manufactured products.Another reason why China may avoid a currency revaluation: The country is increasingly appeasing U.S. critics by agreeing to buy more U.S. non-textile products. Witness the recent agreement to purchase millions of dollars worth of American- made autos and components.Steps to improve exports — such as ongoing negotiations to lower other nations’ trade barriers — can’t be ignored either. Other factors pointing to a more positive export picture would have to include a slightly weaker dollar, which makes U.S. offerings somewhat cheaper; and a strengthening world economy, which will hopefully sweeten demand for our textile and apparel products.Strategy For SurvivalNo matter what happens to prices, American fiber producers (along with mills and apparel makers) are readying a spate of new niche offerings — all designed to whet consumer appetites. It’s a strategy that makes a lot of sense. In addition to seeking a good fit, buyers are increasingly interested in such functional apparel benefits as warmth, breathability, stain resistance, water repellency, waterproofness, and perspiration and odor control. And there’s a lot more on the drawing boards — all being readied for introduction over the next few years. One key factor behind all this activity is the need to de-emphasize today’s extremely competitive commodity fibers and fabrics — and instead concentrate on more profitable, customdesigned performance types. In the words of one key textile executive, “the establishment of these niche markets, coupled with new global strategies, will spell the difference between success and failure in the years ahead.”Wilbur L. Ross, chairman of WL Ross & Co. and new leader of Burlington Industries Inc., adds a second factor: the need to put the industry in stronger hands. As he puts it, the survival of the U.S. textile industry depends on the development of technologies that will set it apart from foreign competition.This theme of consolidation is also emphasized by John L. Bakane, CEO of Cone Mills Corp., which has been acquired by Ross’ operations. He notes that “by joining forces we will be much better positioned to meet the enormous challenges of low-cost imports while remaining an important employer in the textile industry.”Still another part of the overall industry survival plan calls for improving supply chain management. The problems and goals call for more emphasis in such areas as product tracking, global linkages, better forecasting techniques, and third-party logistics.In any event, the goal is quite simple — to deliver the right product at the right price at the right time. Quality control is still another area receiving a lot of attention these days. It’s become especially important as global sourcing becomes more and more commonplace. Helping quality control developments has been the introduction of a new generation of electronic and automated instruments. Following up on this, a growing number of companies are moving to on-line monitoring of spinning and finishing processes.The U.S. government is also beginning to provide textile firms with more help — witness the curbs recently imposed on selected Chinese textile shipments. Moreover, increasing pressure from the industry itself should force more government involvement. Clearly, the setting up of a textile trade coalition has made it clear that textile executives and even the unions are determined to make trade a big issue in the upcoming presidential election.Taking off on this, Fernando Silva, managing director of consulting firm Kurt Salmon Associates, says the Bush administration will have to bend a bit in the move to save U.S. textile and apparel firms — adding that “politically, it’s not going to be possible to do nothing.”All these strategies should pay off. To be sure, they’re not very likely to spark any big boom. But they certainly seem impressive enough to stem the sharp declines of recent years — especially now that the economy is in a stronger recovery phase.Global Insight’s latest projections call for a bottoming-out in textile mill activity after mid-2004. Early-in-the year declines could be enough to make for another negative textile mill production year, but dollar declines will be small — only in the order of a few percentage points, far less than the precipitous 7.4-percent drop of 2003.Go beyond 2004, and Global Insight analysts are cautiously optimistic. While still not seeing any textile gains, they expect only minimal erosion — not only for 2005 but for 2006 and 2007 as well.Bottom line: Don’t write off the American textile mill industry or even its downstream apparel counterpart. Both industries will survive.True, companies won’t have cheap labor going for them. But clearly, these domestic firms have big advantages in such vital areas as management expertise, product design and development, quality, sales, marketing, distribution and customer service.The industry survival depends upon the ability of the government to level the international playing field. Download U.S. Textiles 2004 Charts
Spring 2004