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State of the Industry 2009

February 1st, 2009 / By: / Markets

The turmoil in the U.S./global economy and its impact on the specialty fabrics industry

Market strength worldwide

In the U.S., specialty textiles account for about 23 percent of production and consumption of textiles overall. The breakout of the consumption of specialty fabrics by selected developed countries: United States, 23 percent; Europe, 22 percent; China, 13 percent; and India, 4 percent. The U.S. share of production of the world fiber market has been decreasing for the past five years, from 10.6 percent in 2004 to 7.5 percent in 2008.

The world market for specialty textiles was estimated to be about 21 million tons, with a value of approximately $115 billion, in 2007. Initially this was expected to increase to 24 million tons, with a value of $127 billion, by 2010. Overall, growth rates of specialty textiles in the world have been about 4 percent per year greater than the growth of home furnishings or apparel textiles, which are growing at the rate of about 0-1 percent per year worldwide. Recently, however, the forecast has changed, given the breadth and depth of the declining global economy, especially since the second half of 2008.

As a result, the global growth rates for specialty textiles, home furnishings and apparel may all decrease by 1 to 2 percent in 2009. According to a UCLA Anderson Forecast report, Europe and Japan are already in a recession, and China and India are suffering from a significant slowdown in growth. The export boom of the past few years will wane.

U.S. sales of highly fabricated textile products are expected to decline 9.1 percent in 2008 to $30.6 billion. The tight credit market, anemic customer demand, high raw material costs and the continued influx of inexpensive imports have caused erosion in sales and margins for many U.S. specialty fabric suppliers and end-product manufacturers in 2008. Business equipment spending and industrial production weakened in the second half of 2008, and slowing economic activity in many overseas economies is damping the prospects for U.S. exports. Continued financial turmoil is also likely to create an increased restraint on spending by consumers and business, further reducing the ability of households and businesses to obtain credit.

There is some good news in this economic morass. Despite the plant closings and job losses of the last 10 years, the U.S. textile industry continues to invest in new machinery and technology, spending more than $2 billion a year to maintain modern manufacturing facilities. U.S. suppliers and end-product manufacturers who compete in high value-added market segments and are leaders in their respective markets are doing fairly well. These manufacturers tend not to compete on the basis of price, but rather emphasize innovation and superior quality, not only in products but customer service as well. (For example, one U.S. supplier offers an on-demand ordering system via a proprietary interactive Internet portal, saving customers time and money.) End-product manufacturers who are doing well tend to go to great lengths to first define and then serve their customers’ needs.

Key U.S. markets

There are four key markets within the U.S. specialty fabrics industry, each impacted by different forces and economic drivers.

Military. The military market includes safety and protective gear (including smart fabric technology) for troops, firefighters, and law enforcement, and is growing at about 10.0 percent per year. This market is the driving force behind product developments for the firefighter, law enforcement and industrial markets. Its dominating influence on the safety and protective market should continue through 2009. Another factor: In a letter to the National Council of Textile Organizations (NCTO), President Obama pledged his support for the Berry Amendment, which requires the U.S. Department of Defense (DoD) to buy only U.S.-made textiles.

Construction. The use of geosynthetics in construction is growing in the U.S. at roughly 5.0 percent annually. Geosynthetic products include geotextiles and geogrids, which are used in erosion control, road construction and other infrastructure projects. President Obama’s proposed economic recovery plan, if passed by Congress, would be a shot in the arm for the geosynthetics market segment. His plan would be the single largest new investment in the U.S. infrastructure—roads and bridges—since the creation of the federal highway system in the 1950s.

Transportation. The largest market affected (in terms of dollars) is transportation—the automobile/light truck market. A significant decline occurred in 2008, from about 16 million vehicles sold in 2007 to about 13 million (in terms of fabric, a loss of roughly 114 million square yards for 2008). Carmakers around the world have raced to cut costs as the global economy deteriorates. In the U.S., there has been a decrease in auto and light truck sales every month since September.

Recreation. The recreation market includes market segments such as awnings and marine fabrics. Growth in the U.S./Canadian awnings market is down from about 3 percent in 2007 to about –3 percent in 2008. The U.S./Canadian marine fabric market was down 6 percent in 2008 from 2007.

End-product manufacturers focused in commodity-type markets with less diverse product line-ups are struggling to keep costs and prices down and profits expanding. Many are feeling the pressure to purchase lower-cost imported fabrics.

Economic impacts, trends

Throughout 2008, high operating costs (oil/gas, raw materials, labor) for suppliers and end-product manufacturers made it difficult to expand profits. During November-December there was a drop in prices for petroleum-related raw materials at the chemical company level of the supply chain. Unfortunately, these price decreases have not yet been passed on by the chemical companies. Suppliers/distributors and end-product manufacturers will continue to pay higher raw material prices for another 3-6 months or more. Once these higher-priced raw materials have been used up, the industry should begin to see lower costs for petroleum-related raw materials.

From October through December, consumer demand fell sharply for many manufacturers as the tight credit and job markets worsened. For many suppliers and end-product manufacturers, the big problem has become a lack of customer demand, coupled with a greater consumer focus on price.

Increasing consolidation is occurring as the ailing global economy weeds out players in the market who have not or cannot adapt to changing markets and reduced customer demand.

Green has gone mainstream in the U.S. home building market. Green home building is poised to generate between $12 and $20 billion in sales this year, accounting for a 6-10 percent share of the U.S. housing market, up from $7 billion in home sales and a 2 percent share of the market in 2005. This year’s green building is projected to double over the next five years, reaching a 12-20 percent share of the U.S. housing market with $40 billion to $70 billion in sales in 2012. This trend bodes well for the awning market: A recent energy study by the Professional Awning Manufacturers Association (PAMA) showed that awnings can reduce cooling costs by 20-30 percent. The higher quality associated with green building appears to be a key factor driving demand at a time when homes need to stand out in a market with a glut of inventory. Rising energy costs increase customer willingness to pay a premium for green housing.

Some U.S. textile companies are building strategic partnerships with government and industrial research and manufacturing organizations to improve fabrics and applications. For example, a research team from Auburn University and Georgia Tech (working together through the National Textile Center1—a consortium of eight universities) has been working closely with DuPont’s Richmond facility as well as with the Milliken Co. to investigate and design novel lightweight fabrics with demand-activated stiffening properties for protection against projectile impacts, such as bullets and shrapnel.

Continuing market issues

Import/export balances

China still holds a commanding lead in the U.S. specialty fabric import market, with almost 47 percent market share in late 2008. However, total specialty fabric imports into the U.S. decreased about 7 percent as of November-YTD 2008. Pakistan, India, Mexico, Canada, and Korea represent the second tier of participants in the 2008 U.S. specialty fabric import market, with each enjoying 4.7-8.0 percent share. China, India, Israel, Thailand, and Japan were the only major players who achieved a positive percentage change in U.S. import market share in 2008; China led the way with 1.7 percent positive change, with India following at 0.9 percent.

Mexico is easily the leading U.S. specialty fabric export market, achieving approximately 37 percent share in 2008, down 4 percent from 2007. Canada comes in second at 20 percent, followed by China, with a 4.2 percent export share.

China’s influence

  • The U.S. International Trade Commission (ITC) has agreed to monitor a group of textile and apparel imports from China, facing the possibility of a market-disrupting surge in imports from China when safeguard quotas on 34 product categories expired on December 31, 2008. The House Ways and Means Committee has the authority to investigate any violations, which could ultimately lead to the imposition of tariffs or quotas.
  • Many economists estimate that the Chinese Yuan is more undervalued in 2008 than it was in 2007. This issue has resonated with President Obama; he supports the monitoring of textile imports from China by the ITC. He has also promised to beef up U.S. enforcement efforts against unfair trade practices and increase resources at the U.S. Trade Representative’s office.
  • The picture is starting to change for China. Its government has allowed its currency to appreciate 18 percent against the U.S. dollar, although most economists believe that much more is needed to bring things back into balance. China is gradually losing its traditional competitiveness in production costs; as it has become more industrialized over the years, production costs have increased in terms of raw material, labor (higher wages) and energy. Rising interest rates and capital shortages have also affected China’s textile industry. New labor laws were introduced in January 2008: a five-day work week, 12 holidays in addition to national holidays, and triple time for working on national holidays. Labor in China is inexpensive, but increasing development is slowly changing the balance.

Overall exports in China fell 2.2 percent in November 2008, the first time they have fallen in seven years. Factory closures are occurring across textile and non-textile markets. This is bad news for a country in which exports account for roughly 40 percent of total output. Overseas customers, suddenly cut off from easy credit, have slashed their spending. According to the World Bank, export growth for China will be very weak in 2009.

In November 2008, the Chinese government announced a $586 billion program to boost the economy. It’s likely that China’s export sector will begin to show signs of stabilization only with a global recovery.

U.S. market dynamics

Global GDP growth slowed to 3.7 percent in 2008 and is predicted to slow to 2.2 percent in 2009—due largely to the weakening U.S. economy. Growth has also slowed in Western Europe: GDP is projected to be –0.5 percent in 2009, down from 1.2 percent in 2008. China’s economy is also expected to slow somewhat; GDP is expected to be 8.5 percent in 2009, compared to 9.7 percent growth in 2008. U.S. real GDP growth decreased from 2.0 percent in 2007 to an anticipated 1.4 percent in 2008, and is expected to decline in 2009 to –0.7 percent.

The U.S. unemployment rate has reached record highs, in the 6.2–7.2 percent range from August through December 2008, bringing the year’s total job losses to 2.6 million, the highest level in more than six decades.

Double-digit growth, 12.2 percent YTD-November 2008, in the nonresidential construction market (lodging, office, commercial, manufacturing) has helped buoy the U.S. specialty fabric market. Commercial construction alone has been down 2.7 percent in growth YTD-November 2008; residential construction has experienced a steep decline in growth, registering a negative 27.2 percent YTD-November 2008.

The Federal Reserve decreased the Federal Funds rate twice in October, from 2.0 percent in early October to 1.0 percent on October 29, to prop up the U.S. economy. On December 16, the Federal Reserve established a target range of 0.0 to .25 percent in another effort to stimulate credit and lending, investment by businesses and spending by consumers. This marks the tenth time the Federal Reserve has cut rates since September 2007.

U.S. industry outlook

The U.S. specialty fabrics industry grew approximately 1–2 percent in 2008. Overall growth in 2009 is expected to be flat to approximately 1 percent as the global recession takes its toll. But end-product manufacturers who focus on selling high-value products and services could achieve growth in the 5–10 percent range in 2009. Examples of high value-added markets include safety and protective products (largely fueled by military demand), geosynthetics, medical textiles and digital printing on textiles, especially wide-format printing. Growth in 2009 will depend a great deal on how quickly tight credit markets begin to thaw, and when sustainable increases in business investment and customer demand occur.

  • Excess mill capacity in 2008 and high raw material prices have ballooned price increases for fabrics in 2008 and will likely continue to do so in 2009. The U.S. Bureau of Labor’s producer price index (PPI) for specialty fabrics spiked to 4.0 percent in 2008 (November-YTD 2008). Suppliers and end-product manufacturers will likely be unable to continue to absorb raw material price increases in 2009 and will begin to pass them on to their customers, if they are not already doing so.
  • In 2009, there will be a continued culling of weaker, less efficient manufacturers. Price pressures from inexpensive imports will continue to erode sales and profit margins. Today’s specialty fabric suppliers and end-product manufacturers are fighting on many fronts: In addition to industry consolidation, high raw material costs and international competition, they’re dealing with a nasty recession that is expected to tighten its grip next year. Customer demand will remain weak in many markets. One positive note: The weak economy has forced businesses to think hard about their business focus, implement strict cost containment measures, and do more with less.
  • Competition for customers will be fierce. Business focus and spending should be geared towards innovation, differentiation, quality and value.

Despite these economic woes, many U.S. specialty fabric suppliers and end-product manufacturers have adapted to these tough times and are moving ahead—but are doing so in a focused, deliberate manner with an eye to containing costs while still emphasizing quality and innovation. An economic downturn is no reason to stop spending on innovation. Successful businesses will counter economic constraints by:

  • Deploying effective cost controls (both operating and administrative expenses);
  • Focusing on delivering quality products/services to their customers;
  • Demanding and delivering product/service innovation;
  • Clearly communicating the benefits of their products/services to their customers;
  • Pursuing market diversification that emphasizes higher-profit niche products; and
  • Embracing the growing trend toward global sourcing.

It’s not possible to predict exactly what 2009 will bring to the specialty fabrics industry. There are starting to be signs of retrenchment, but many experts posit only slow recovery next year. Positive, sustainable growth will be more achievable for those businesses that embrace tactics like these and stay focused on customer needs.

Jeff Rasmussen is a market research manager at the Industrial Fabrics Association International, at +1 651 225 6967, e-mail jcrasmussen@ifai.com.

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