Spend Matters welcomes this guest article by Monika Sosnowska of Mintec.
Looking at global raw textile prices, one could wonder if a major sale in the apparel market is likely to happen soon.
Cotton, polyester and wool prices have been on a strong downward trend, with Chinese cotton dropping as much as 40% since January 2014. So, should we expect to see lower prices of our favorite clothing brands? Especially since the decline in the price of crude oil and gas has made transportation more economical as well.
With the abandonment of a disastrous government stockpiling policy in China, cotton prices started to fall last year. Prices, however, have been much more stable this year, supported by the expectations of a lower end of the season stock level, which, according to the August forecast, is expected to drop by 5% year-over-year in the 2015/16 season.
The recent falls in crude oil and gas prices have not only affected transportation costs, but also polyester yarn, as it is made out of crude oil derivatives. With a sharp drop in the derivative’s cost in the second half of last year, prices of polyester reduced considerably as well. Additionally, the fall in cotton prices put pressure on polyester, which has to stay cheaper than cotton in order to remain competitive. As cotton is a natural fiber, it is more desirable in apparel manufacturing than polyester.
Australian wool prices had been relatively stable in AUD last year, but they became cheaper in USD terms due to the strong US dollar. In recent months, though, wool prices recovered, supported by low stock availability and strong demand from China.
So, all in all most textile prices have fallen over the last few years. Does that mean clothes will become cheaper? Will these savings be passed along the supply chain? Perhaps, perhaps not. According to market analysts, the cost of the raw material in apparel production accounts for only around 10% of the total cost. The cost of production, packaging and shipping into the US is no more than 30%. Still, more surprisingly, the labor cost accounts for only between 0.5% to 1%. (If anyone is interested in the full structure of the apparel industry, the recently released movie “The True Cost” by Andrew Morgan would be worth a watch.)
Let’s not forget, demand is also a huge driver in the textiles market. US retailers have been disappointed by the level of demand seen this year, as the lower cost of gas bore expectations of higher consumer spending. Unfortunately, though, it seems as if the money stayed in people’s pockets instead.