Coface Group
Textile - Clothing

Textile - Clothing

Textile
Latin America
Northern America
Central & Eastern Europe
Western Europe
Emerging Asia
Middle-East & Turkey
Change sector

Strengths

  • Growing middle class in emerging countries
  • Fall in prices of cotton and synthetic fibres 

Weaknesses

  • Substantial cotton stocks in China, where destocking is hampering demand on the global market
  • High demand elasticity product
  • Sales threatened by e-commerce

Risk assessment

highlights
Change in oil, PET and cotton prices  (100 = October 2014)

Change in oil, PET and cotton prices
(100 = October 2014)

Textile sales remain sluggish in North America and Western Europe. Company defaults have increased in the traditional textile segments in Western Europe. In all developed countries, traditional distribution channels are victims of the development of online sales. In emerging Asia, textile production remains hampered by China's decision to limit duty-free cotton imports since 2013. However, Chinese industrialists have been sourcing quality cotton from outside the country, which is driving up production costs.

The textile - clothing sector is marked by the increasing replacement of cotton with synthetic fibres (polyester, acrylic, viscose). Globally, cotton accounted for only one-third of textile consumption in 2015 versus one-half in 1994. Less costly, easy to mix with other fibres and with a limited impact on the environment compared with cotton, synthetic fibres concentrate technological progress in the textile sector. Furthermore, prices of polyethylene terephthalate (PET) and oil, from which it stems (chart), are correlated. In late 2016, whereas both oil prices and PET increased respectively by 26% and 10%, cotton prices increased substantially (+26%), accentuating even further the competitiveness of synthetic fibres relative to cotton.

Demand

Global cotton consumption is set to notch up by just 0.6% in 2016/17 (August/July) and by 1.2% in 2017/18. Consumption volumes remain far lower than the levels noted before the global financial crisis in 2008 (24m tonnes in 2015/2016 vs. 65.2m tonnes in 2007/2008).

In North America, textile consumption is expected to be affected by the sluggish growth in the United States.  (+1.8% in 2017 according to Coface). The election of Donald Trump also causes serious uncertainties about consumption and investment in US.The decline is likely to be similar to that seen in 2016, when average growth in retail clothing sales was far lower than average growth over the year in 2015. This decline in in-store clothing demand is also affected by the sharp growth in demand for internet sales. In 2016 in the US, out of 100 clothing articles sold in the retail network, only 20 were actually sold in a physical stores (14 directly by internet and 66 in a physical store but influenced by internet). In 2011, almost half (49%) of clothing sales were exclusively sold in stores, according to Forrester Research.

The general situation seems to be even less favourable in the Eurozone where 9.8% of the active population was unemployed in Q3 2016. In 2017, an upturn in this figure should enable slightly better sales growth. In 2016, the level was slightly better than the average in 2015. However, while young consumers allocate more resources to textile, 20% of them were still unemployed in Q3 2016 (15-24 years).

In China, the world’s leading consumer of cotton (30% of global consumption), consumption is set to fall 1% in 2016/2017. While this country is by far the market where growth in clothing sales is the most dynamic, the pace has slowed, falling from 7.6% in 2015 to less than 6% in 2016 according to the national statistics bureau. This trend should amplify in 2017, given the forecast for a decrease in GDP growth in 2017 (6.5% vs. 6.7% in 2016 according to Coface).

Supply

Global cotton production is set to fall sharply in 2015/2016 (-18.8%), for the fourth year in a row. Stocks are expected to fall 12% in 2016 but should nevertheless represent 93% of annual production. In 2016/2017, a slight recovery in global cotton production is hoped for (+5.9% according to the EIU), given notably more beneficial weather conditions (El Nino is not expected).

The impact on cotton prices is mixed for 2016. Between January and March, these reached a low point ($1.48/kg) since 2009, given the uncertainty caused by cotton auction sales by the Chinese authorities. These auctions finally took place in May 2016, and Q2 prices then reached a peak of $1.88/kg (a two-year record) in August.  The main cause stemmed firstly from very optimistic projections by investors for US exports and secondly, uncertainty on the weight and the quality of Chinese stocks. However, in view of sluggish global growth, persistently mammoth global cotton stocks (nine months of consumption in 2016/2017), this increase in prices should not persist in 2017(+2.5%), especially since production should increase further (+25%) in the US (3rd global producer).

In China, the government has reduced its duty-free import levels for raw cotton, given the massive amount of stocks. Combined with the increase in labour costs and production costs as a whole, Chinese cotton plants are also less and less competitive. With prospective growth of 19% in 2016/2017, clothing production in Bangladesh should benefit from Indian and Chinese relocations thanks to hourly wage rates that are among the lowest in the region. Pakistan (4th global producer) remains affected by volatility in its electricity production due to an infrastructure shortfall.

Like Vivarte (la Halle, Naf Naf, Kookaï…) where a fourth CEO (in two years) was nominated in October 2016, the textile segment positioned in the mid-range is suffering extensively in Europe.

The increase in oil prices in 2017 (+19% according to Coface $ 53.4 in 2017 against $ 44.7 on average in 2016) could drive PET prices up, and support cotton competitiveness relatively to synthetic fibres. Emerging Asia is home to nearly 90% of global polyester production. The comparative advantages of synthetic materials outweigh those of cotton, the use of which will continue to decrease. In the long term, demographic growth will encourage greater farming of arable land. The decline in cotton prices and the increase in demand for food are driving farms to switch to more profitable crops.

 

Last update : December 2016

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