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As cotton costs cool will garment prices fall too?
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As cotton costs cool will garment prices fall too?

  • Categories:Industry News
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  • Time of issue:2011-08-05 08:00

As cotton costs cool will garment prices fall too?

(Summary description)Cotton forecast figures released this week painted a far rosier picture than anyone in the apparel industry would have expected just four months ago.

  • Categories:Industry News
  • Author:
  • Origin:
  • Time of issue:2011-08-05 08:00
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Cotton forecast figures released this week painted a far rosier picture than anyone in the apparel industry would have expected just four months ago.

 

In New York, cotton for December delivery dipped to US$1.04 a pound on the ICE Futures US exchange - more than half the record high of $2.27 per pound reached in March.

 

And inter-governmental group the International Cotton Advisory Committee (ICAC) confirmed that prices are likely to continue to decline over the next year as production increases help to replenish stocks.

 

But while there's the temptation for retailers and their suppliers to breathe a sigh of relief that the roller-coaster ride may finally be over, industry observers warn it's not the end of the story.

 

Because of the timing of the fall in cotton costs, and the six-month lead-times to which many firms still work, any easing of sticker prices isn't going to show up until new merchandise hits the shelves next spring.

 

Indeed, the best UK fashion retailer Next was able to come up with when it released its first-half results yesterday (3 August) was that "2012 looks like it will be a more benign year for cost price inflation," and that "selling prices are unlikely to rise further for spring 2012."

 

Likewise, "there are a lot of other inflationary factors that people need to keep an eye on," points out Vinod Rangarajan, a retail strategist at consulting firm Kurt Salmon.

 

These include double-digit wage hikes in Central America, Vietnam and China - all of which will start working their way into the bottom line by the middle of 2012.

 

"Wages in China have gone up 15-20% this year, so that's obviously going to have a tremendous impact on the cost of goods," Vinod explains. "And who knows what's going to happen in terms of fuel costs and how that will impact transportation?

 

"So while cotton prices are coming down and commodity prices might be coming down, other factors are still going in the other direction."

 

Rangarajan believes another issue to watch in the longer term is factory capacity. "As we see these workers get higher and higher wages they're going to be more 'consumeristic,' so demand in those domestic markets where we're producing is going to increase.

 

"We're already seeing China shift some of their manufacturing capacity just to meet domestic demand. So that's going to have an impact too.

 

Volatility set to stay

 

So while there might be a little easing on fabric costs, all these other issues may mitigate some of the declines. "We don't know yet is if that enough to offset the other increases we're going to see."

 

Depending on the type of product, fabric can account for anywhere from 30-60% of the cost of a garment - sitting at the higher end of this range for T-shirt and underwear manufacturer Hanesbrands Inc where nearly two-thirds of its products are cotton-based.

 

"We're probably going to have to deal with a highly volatile situation for a long time to come," said chairman and CEO Richard Noll on a conference call with analysts last month to discuss the company's second-quarter results. "Where it's all going to settle out for 2012 is anybody's guess."

 

The company has already raised its prices twice to offset raw material inflation, and says cotton bought at between $1.70 and $2 a pound is now working its way through the supply chain, hitting retail stores in the fourth quarter and into 2012.

 

And it is also in discussions with retailers "about how to make sure that lower cotton prices don't adversely affect them from a negative comp perspective," Noll explains, adding: "We're developing programs to make sure we handle this volatility in a successful manner for both of us."

 

Wherever cotton prices eventually settle - if they do at all - they're still likely to be higher than the $0.60 per pound average seen during the last decade before this recent run-up.

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