2010 State of the industry

A reset economy changes the business of specialty fabrics in the U.S.

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Like the U.S. automobile market, the depressed economy has reset the size, shape and growth of the specialty fabrics industry from top to bottom, throughout all market segments. As a result, there are fewer significant suppliers and end product manufacturers, and the ones that are left have had to develop a more focused market approach and learn to do more with less.

Suppliers are diversifying their market portfolio so if one market is down they can counter it with other markets that are performing better. The opposite seems to be occurring among end product manufacturers. The down economy has forced many fabricators to streamline or specialize in market segments in which they can effectively compete. Also, changes in the industry have meant significant losses in relationships in a relationship-dependent industry.

World market slowdown

In 2007, the world market for specialty textiles was estimated to be about 21 million tons with a value of approximately $115 billion. These figures were expected to increase to 24 million tons with a value of $127 billion by 2010. Then came the worldwide recession. Its chilling impact on businesses began to soar after the bankruptcy of banking giant Lehman Brothers in September 2008.

Traditionally, the worldwide and U.S. growth rate for specialty fabrics has been around 4 percent per year. Growth in 2009 has slowed across the globe by at least 1–2 percent. In the U.S., it plummeted in 2009 from the traditional 3–4 percent to about -6 percent. Growth in the U.S. specialty fabrics market in 2010 is expected to show a slower decline at -3 percent. The world market for specialty fabrics in 2009 is estimated to be approximately 22 million tons with a value of about $120 billion; a more moderate worldwide growth rate of about 2–3 percent is anticipated for 2010.

The changed U.S. market

So why such a precipitous drop in sales in 2009 for U.S. specialty fabric market participants? Lack of customer demand was the chief reason. Contributing factors include a high unemployment rate and the continued reluctance by banks to make loans, especially to small businesses that normally generate most of the jobs in the U.S.

Small businesses, which include many end product manufacturers, have seen their credit lines reduced or eliminated, or they have been able to obtain credit only on significantly more restrictive terms. When the unemployment rate surpassed 10 percent in October 2009, it was the first time it had been in double digits in 26 years; it’s expected to remain near 10 percent through the end of 2010. With high raw material costs and the continued influx of inexpensive fabric imports, many specialty fabric suppliers and end product manufacturers experienced significant erosion in sales and margins in 2009.

Approximately 550 textile plants closed in the past 10 years, causing the loss of thousands of U.S. textiles jobs. This is the unfortunate result of the rise of new technologies in U.S. textile mills, the bleak economy and the continuation of low-cost imports from Asian countries such as China and India.

The upside is that the economy is beginning to show some gains. After four quarters of declining GDP, the U.S. experienced a positive GDP of 2.2 percent in Q3/2009. According to the Federal Reserve, GDP was expected to increase by about 3 percent in Q4/2009. For 2010, GDP growth is expected to be 2.5–3.5 percent—much better than the negative .4 to negative .1 percent projected in 2009.

Specialty fabric industry manufacturers are doing their best to battle back from these difficulties by retooling their businesses, finding more effective work processes, investing in niche products and markets, and controlling costs. One U.S. supplier has developed a customized, company-wide workflow program that has accelerated the product development process. This has enabled them to more quickly and effectively identify products in development with the greatest potential for being commercialized, which will optimize their return on investment.

A U.S. supplier who manufactures high performance materials focused on new product development in 2009. A key official from this supplier cited in September 2009 that as of that time, close to half of the products they were making and shipping were not even being made by them six months prior.

Four key U.S. markets

Four key U.S. markets within the specialty fabric industry are impacted by different forces and economic drivers.

Military. The military segment covers safety and protective products, including smart technology, for troops, firefighters and law enforcement. The U.S. military fabric market grew about 25 percent in 2009, and is expected to decrease about 8 percent in 2010. A driving force behind product developments in markets such as firefighter and law enforcement, the military’s influence on the safety and protective market should continue well into 2010 due to U.S. troop levels in Iraq and Afghanistan.

The military market is buttressed by the Berry Amendment, a ‘buy America’ program designed to ensure a secure source of clothing and textiles for the U.S. military. When President Obama signed the American Recovery and Reinvestment Act in February 2009, under the Kissell Amendment the Department of Homeland Security’s Transportation Security Administration (TSA) and U.S. Coast Guard also became ‘buy America’ programs, which translated into about $6.5 million in clothing and textiles for U.S. suppliers in 2009.

Geosynthetics. The use of geosynthetics in construction traditionally has grown in the U.S. at about 5–6 percent annually, but growth was flat in 2009. Geosynthetic products, manufactured by about 50 companies for the U.S. marketplace, include geotextiles and geogrids, which are used in erosion control, road construction and other infrastructures. Nonwovens are a fast-growing geosynthetic market segment in the U.S., particularly geogrid and geofoam applications.

To date, Congress has delayed their decision on the length of the extension for the Transportation Reauthorization Bill—originally set to expire on September 30, 2009. Congress is now is expected to act on it in the fall of 2010. It is anticipated that the extension will continue transportation programs at their current fiscal year 2009 funding levels. This will be a significant catalyst for geosynthetics.

The reauthorization of the surface transportation bill is potentially worth $375 billion, making it one of the largest public works projects in U.S. history. The U.S. geosynthetic market should begin to rebound to a growth rate of 3–5 percent in 2010 as $50 billion in government funding fuels road and bridge construction projects.

Transportation. The largest segment affected is transportation—the automobile and light truck market. A significant decline in sales occurred in 2009 from about 13 million vehicles sold in 2008 to an estimated 10.4 million in 2009, the lowest since 1982. In 2009, the U.S. auto industry experienced major turmoil; two U.S. auto makers—General Motors and Chrysler—filed for bankruptcy. Long-held brands have been sold to overseas companies and other less familiar international companies now have larger name recognition. But the year finished better for U.S. new vehicle sales, and the Center for Automotive Studies predicts U.S. 2010 sales will rise to 12.4 million. CSM Worldwide forecasts U.S. 2010 light vehicle sales to be 11.8 million, so the U.S. auto market is improving.

Recreation. The recreation market includes products such as awnings and marine fabrics. Growth in the U.S. and Canadian awnings market declined 3 percent in 2008 and 12–17 percent in 2009. Although the U.S. and Canadian marine fabric market was down 6 percent in 2008 and dropped significantly in 2009 to about -18 percent, in the final months of 2009 boat manufacturers began calling back employees. Many of them have depleted their inventories and are now confident enough about 2010 that they are gearing up resources for producing boats again. This market in 2010 is expected to be down about 3–5 percent, but could actually be flat if the economy and consumer confidence consistently improves.

The strength of nonwovens

From 1997 to 2007, world nonwoven tonnage grew at an average annual rate of 7.9 percent. This growth rate should continue at about 6–8 percent per year, reaching 8.4 million tons by 2012. In the U.S., sales of nonwovens were about $5 billion in 2009. Disposable nonwovens dominate the U.S. nonwoven market with about 65 percent share.

The global market in 2007 for medical textiles was about $8 billion, consuming about 2.1 million metric tons per year. Nonwovens are the main fabric type used in medical textiles—75 percent in terms of value and growing at about 6 percent per year. The real driver of the increased use of medical textiles in the U.S. is demographics; in 2007, 30 percent of the U.S. population was age 50 or older.

Before 2009, the growth rate for nonwovens in the U.S. was about 4.5 percent per year; for Europe it was around 7 percent. In 2009, the growth rate decreased in the U.S. to about 2.5–3 percent and in Europe it dropped to about 1–3 percent. Meanwhile, the growth rate for China from 1978 to 2008 was 20 percent per year and is expected to be about 17 percent in 2009. Healthy growth in 2009 and beyond is expected in Brazil, India, Russia, and Turkey, as they invest in their respective countries’ infrastructures.

Growth in the U.S. will be led by market segments such as medical products, filtration products and geosynthetics, which have held their own in 2009 despite the economy.

Worldwide nonwoven production volume estimates are at 6.7 million tons for 2009 and show the hygiene market with 33 percent, the highest share of the nonwoven market. Home furnishings follow with 15 percent, construction with 13 percent, and furniture and filtration applications both show a 6 percent share.

The issues

Import/export balances. China still holds a commanding lead in the U.S. specialty fabric import market with almost 48 percent market share. However, total specialty fabric imports into the U.S. decreased about 10 percent as of November–YTD 2009. Pakistan, India, Korea, Mexico and Canada represent the second tier of participants in the 2009 U.S. specialty fabric import market, with each holding 4.6–8.1 percent share. Vietnam and China achieved the highest positive percentage change in U.S. import market share in 2009; Vietnam led the way at 1.3 percent, followed by China at 1.2 percent.

Regarding U.S. exports, Mexico is number one in the U.S. specialty fabric export market, accounting for a 37 percent share in 2009; Canada is a distant second at 19 percent and China holds a 5 percent share.

A restrained recovery

Global GDP growth slowed to -1.1 percent in 2009, but is expected to climb to 3.1 percent in 2010. Industry growth in 2010 is due largely to signs of growth occurring in the U.S. economy. After four quarters of negative GDP, Q3/2009 GDP came in at a positive 2.2 percent. Growth also slowed in Western Europe where GDP is projected to be -4.2 percent in 2009, down from 0.7 percent in 2008. China’s economy showed strong growth in the first nine months of 2009 and is on course to report a real GDP of 8 percent for 2009.

Looking beyond 2009, the pace of the economic recovery is expected to be restrained by household and business uncertainty, weak labor market conditions, and the slow waning of tight credit conditions in the banking system. Federal Reserve officials anticipate that about five or six years may be needed for the economy to converge fully to a longer-run path characterized by a sustainable rate of output growth and by rates of unemployment and inflation consistent with a more stable economic environment.

While the U.S. specialty fabrics industry declined about 6 percent in 2009 and overall growth in 2010 is expected to be down about 3 percent, end product manufacturers who play in more high value-added market segments, or focus on producing and selling high value products and services, may achieve growth in the 3–10 percent range in 2010. Examples of some high value-added market segments include safety and protection, geosynthetics, medical textiles and wide-format, digital textile printing.

Industry outlook

Specialty fabric suppliers and end product manufacturers who have not been able to adjust to the economy of 2009 have dropped out or lost their standing as significant players in their respective markets and have had to battle a number of fronts in order to succeed in the marketplace:

  • Lack of demand for products and services throughout the value chain
  • Continued industry consolidation
  • High raw material costs
  • Overseas competition, especially from China
  • Tight credit markets

In the final quarter of 2009, the weak credit market continued to retard the ability of businesses to purchase capital to produce more inventory, although this is getting a little better. However, a sustained rebound in 2010 by more market segments will be needed to generate new financing needs and investment opportunities. Until the availability of credit becomes more prevalent on a consistent basis, it remains one of the main hurdles to overcome in order to achieve stronger, more sustainable growth in 2010.

Seeing opportunity

The depressed world economy has prompted many companies to implement significant cost-saving measures to remain viable in the long-run, including staff reductions, line closures and work furloughs. But there are a number of companies who have adapted to the reset specialty fabrics industry. Successful players have seen opportunities in the marketplace and have taken advantage of them, believing that an economic downturn is no reason to stop spending on innovation. They are selectively investing in new product development and ramping up investments for the sustained recovery that will indeed come, possibly in 2011.

A number of sources (the Federal Reserve, industry surveys and interviews with key industry people) indicate that the opportunities in front of participants in the specialty fabrics industry in 2010 will be greater than the difficulties we left behind in 2009. The challenge for players in the specialty fabrics industry is to identify the opportunities as they arise—and then take advantage of them.

The State of the Industry is an annual look at the status of the U.S. specialty fabrics industry based on IFAI research results. A more comprehensive and updated analysis of the state of the industry with detailed information on specific markets will be available for purchase in mid-March. Contact Jeff Rasmussen, IFAI market research manager, at +1 651 225 6967 or jcrasmussen@ifai.com.

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