Why clothing prices are set to take off: Maley

The gigantic global garment industry heaved a sigh of relief overnight as the cotton price eased back slightly from the all-time peak of $1.90 a pound it reached last Friday.

With cotton prices more than doubling during the past 12 months clothing manufacturers and retailers are worried that they’ll soon have to start marking up prices.

The surge in cotton prices started last August, after heavy rains affected major cotton producers including China, the US, Australia and Pakistan, and disrupted global supplies. At the same time India – the world’s second largest cotton- growing nation – introduced restrictions on cotton exports.

The price of synthetic fabrics, such as rayon, also rose sharply as manufacturers sought cheaper alternatives to cotton or used more blended fabrics.

Rising production costs in China have exacerbated the problems of the clothing industry. For the past decade multinationals have manufactured clothing cheaply in China but many Chinese factories scaled back output during the financial crisis and are now having to pay higher wages to attract workers as they ramp up production to meet higher global demand.

Some clothing retailers have already lifted prices to reflect higher raw material and labour costs and more are likely to do so in coming months as the effect of surging cotton prices flows through the pipeline. Cotton in garments now being sold in stores was harvested about six months ago and cotton prices have soared by around 30 per cent since the start of this year.

Last December, Mike Parker, head of giant sporting clothing and footwear group Nike Inc, warned that profit margins were likely to come under pressure in coming months as a result of rising cotton prices as well as higher labour and transportation costs. “As supply and demand find a new normal in the recovering economy our industry is going to experience margin pressure due to rising input costs,” he predicted.

With US unemployment levels high, and consumers wary of opening their wallets, it’s extremely difficult for clothing manufacturers and retailers to pass on higher costs in full.

In a recent interview Mike Duke, boss of retailing giant Wal-Mart, said:  “There’s no doubt there may be some price increases that come up, but we don’t want to ever let that be the first answer … that just because cotton prices are up that we’re automatically going to pass that on to consumers.”

Those in the rag trade aren’t the only ones feeling their margins being pinched as a result of higher raw material costs.

The latest profit season in the US has seen evidence of margin squeeze at a number of major consumer companies, including Procter & Gamble and Kraft Foods, due to higher raw material costs.

And many analysts believe that squeeze is the biggest reason for distrusting the latest US share market euphoria.

This article first appeared on Business Spectator