It has been a very mad day / week if you are in China’s textile business.
Commodity price inflation is being sorely felt here on-the-ground in Hangzhou. For example, Cotton prices have shot up in the past few weeks. The China Cotton Index hit US$4,332 per ton, a rise of over 100% on the same time last year. My Italian colleague, who has been trading in textiles (garments, etc) for over 18 years hasn’t seen anything like this before.
“China is losing is competitiveness”, and he wonders how long China will stay at the helm of this industry.
Such is the severity of recent price increases, over the past few days his factory managers have been unable to secure any raw cotton, due to rampant speculation and hoarding by suppliers. Another friend in garment manufacturing described today’s attempts to secure cotton and other fabrics as “mayhem”.
Many export oriented textile manufacturers in and around Hangzhou and Zhejiang Province (the cradle of China’s textile business) are struggling to survive not only amid rising raw material costs, but also rising labour costs. Since January 2010, factory worker wages have increased by at least 30%.
And if these problems weren’t enough to handle, a severe labour shortage is forcing plants to stop production, all of which are leading to delivery delays.
China’s textile industry is facing competition from other Asian countries with an abundance of raw material, such as Pakistan, and low labour cost countries such as Laos and Cambodia who are in catch-up mode.
Last month the People’s Daily newspaper ran an article acclaiming the fact China exported US $ 149.8 billion of textile products in the first nine months of the year, an annual growth rate of 23.14 %. However, the numbers are misleading, according to my colleague, who argues the numbers are only growing because buyers are making bulk orders. While in the past buyers would purchase about one or 2 months demand, now, with one eye on price rises and delivery delays, buyers are purchasing up to 6 months of product in one order.
Over the next few days expect the Chinese Government to announce a policy response consisting of price intervention and allowing the Chinese RMB to appreciate faster against the US$ over the next year (5%).