Date January 2017
Approximate Net Recovery on Cost
- Strong gains in home renovation and repair spending increased demand for home furnishings and are expected to drive textile consumption in 2017
- Technical textiles remain an area of growth for domestic producers, especially demand from the automotive sector
- Cotton prices rose sharply during the second half of 2016, ending the year 14 percent higher in the U.S. than in 2015
Private Spending on Home Improvements is Up: Private spending on home improvements, upgrades, and repairs influences demand for fabric-related drapery, upholstery, and home furnishings. Recent gains in home renovation and repair spending are expected to continue, according to the Joint Center for Housing Studies of Harvard University. Rising incomes and lower unemployment increase discretionary income and typically drive stronger investment in homes. Rising home prices in many markets along with increases in existing home sales will support demand for renovations as homeowner confidence increases. The Leading Indicator of Remodeling Activity projects that home improvement and repair expenditures will peak during the third quarter of 2017 at levels not seen since 2006.
Gordon Brothers recommends monitoring private spending on home improvements as demand for fabrics is correlated with discretionary spending on home furnishings.
Import Competition Increasing: Many U.S. companies will continue to outsource textile manufacturing overseas to lower cost countries in China and South America to improve margins, especially of apparel products. Imports are expected to rise approximately 2.3 percent while exports are projected to decline 0.5 percent in 2017.
In turn, domestic manufacturers are looking to improve competitiveness by increasing automation and productivity of mills, lowering labor costs. Others are looking to increased investments in research and development of advanced fabrics as a way to maintain a competitive advantage.
Automotive Demand Remains Strong: The automotive industry is one sector driving demand for technical fabrics. Manufacturers purchase various narrow fabrics that include seat belts, airbags and seat covers, and vehicle interiors. During the next 12 months, new car sales are expected to increase by 0.5 percent. While that number may sound modest, it maintains a strong level of production.
As these fabrics are produced on an order basis, it is important to monitor the company’s backlog in valuing these technical textiles. As safety standards and designs change from year-to-year for vehicles, it is crucial that these fabrics are tied to open orders as old fabrics will have only a scrap value.
Consider a Conversion Scenario: As a large portion of the fabric industry is on an order basis, it is important to consider completing a conversion scenario of the work-in-process. Due to the fact that a large portion of the finished goods are sold as soon as they’re manufactured, the class mix of the inventory could be highly concentrated towards work-in-process, a low recovering class of inventory. Conversion of the work-in-process would give the order its contract value in a liquidation scenario less some order fallout and shrinkage.
World Cotton Prices Expected to Fall in 2017: Cotton, the most common raw material used in the manufacturing of fabrics, is an important price to monitor. While China is the dominant exporter to U.S. mills, Pakistan and India are major traders. Disruptions in their supply chains last year caused cotton prices to rise globally.
In Pakistan, disease and pest infections pulled yields 30 percent, which drove up imports from neighboring India. However, at the same time, a reduction in plantings and difficult growing conditions caused India’s surplus of production to fall 60 percent in 2015-2016 compared to the 2014-2015 crop year. This lack of warehoused supply caused domestically produced fiber to increase 40 percent in India.
These trade relationships have had effects on pricing for the entire world, and supply disruptions overseas affect prices paid in the U.S. where prices were 14 percent higher at the end of 2016 than the year prior. This year, India and Pakistan are expecting better growing conditions and are hoping to replenish depleted stockpiles, which should bring prices down.
Gordon Brothers recommends regularly monitoring world cotton prices as they are highly volatile, and rising prices increase costs for mills and reduce profit margins for fabrics.