The Silk Road: Are People Seeking Luxury Goods Again?

Spend Matters welcomes a guest post from Robert Miles, at Mintec Ltd.

Silk was once one of the world's most important commodities, traded largely across Asia to Europe by a variety of tortuous land routes known commonly as the Silk Road. It is a natural protein fibre obtained mainly from the cocoons of the larvae of the mulberry silkworm, reared in captivity in a process known as sericulture.

It now represents a tiny fraction, less than 0.2% by volume, of the global textile fibre market, but its trading value is well in excess of this. Raw silk currently trades at roughly thirty times the price of raw cotton and the annual turnover in the world's silk trade is around USD 3.75bn.

Production of raw silk is dominated by two main sources of supply. Around 70% of the world's raw silk is made in China, while about 20% is made in India.

India is the world's largest consumer of silk and, limiting the potential for export growth, demand for silk in India (particularly for the weaving of the traditional sari) regularly exceeds supply. The EU purchasers large quantities of silk, and has a silk industry mainly producing such items as ties, scarves, shirts and blouses. Surprisingly, the US is small player in the raw silk market. But they still have one of the world's largest markets for silk products, largely in the form of finished garments and accessories.

Prices for silk have been tending to rise over the last decade due to growing world demand. A fall in silk manufacturing subsidies in China, as well as drought and the rapid urbanisation of the key silk producing area around Shanghai (which has reduced the land available for mulberry trees, the leaves used to feed silk worms) have all been factors in decreasing the available silk supply.

Prices peaked in the first half of 2011 but returned to more comfortable levels in the second half thanks to new harvests (silk harvests in China tend to occur around June), improved weather, and a return to rising silk production in China and India leading to improved global raw silk supply.

Increased supply and lower prices (compared to the peak at the start of 2011) have enabled weavers to switch back to silk from synthetic yarn and labour costs in China have also risen, forcing mills to increase salaries in order to maintain their workforce. Prices for raw silk are now shown up by about 11% in China in terms of CNY, and by 15% in India in terms of Indian Rupees, since the start of 2012.

Perhaps the signs are showing us that people are actively seeking luxury again -- is this an indication of better times are ahead or just a change in fashion?

- Robert Miles, Mintec Ltd.

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