TEXTILES.ORG
Steady but slow economic recovery characterized the industry in 2012.
By Jeff Rasmussen
The economic recovery across the globe continues, but at a weakened pace. Growth in U.S. GDP was up slightly at about 2 percent in 2012, compared to 1.8 percent in 2011. The small increase in GDP was accompanied by an uptick in demand for most market segments in the U.S. specialty fabrics industry.
Europe’s debt woes are expected to continue to be an impediment to growth worldwide while China continues to overcome slow growth in its export market by pursuing growth in its domestic economy.
Eight of the 10 end product market segments IFAI regularly monitors achieved single-digit sales growth in 2012—with improvements in growth occurring in market segments not seen in the past 2–3 years. A ninth market, U.S. light vehicles, achieved double digit sales growth. Investing in state-of-the-art equipment, lean/quality improvement manufacturing practices, training staff and improved marketing targeted toward the customer have helped many organizations increase sales and profit margins.
In 2012, end product manufacturers (EPMs) continued their efforts to diversify into non-fabric-oriented markets to help grow revenue and support the fabric side of their businesses.
World markets
In 2012, the world market for specialty fabrics grew about 2.5 percent and is expected to achieve sales growth of about 2.7 to 3.0 percent in 2013. Constraints on global growth in the 2013 specialty fabrics market are largely attributable to a projected growth rate of 3.6 percent in worldwide GDP; this is up from 2012 when GDP was 3.3 percent. The debt crisis in Europe remains the chief risk facing the global economy in 2013.
Estimated growth in GDP in 2013 is projected to increase in many economies around the world: U.S. GDP is expected to increase to about 2.1 percent in 2013 compared with 2 percent in 2012; in developing Asia (China, India and Association of Southeast Asian Nations [ASEAN] members), GDP is expected to be 7.2 percent in 2013 compared with 6.7 percent in 2012; the Euro Area’s GDP is expected to increase to 0.2 percent in 2013 compared with -0.4 percent in 2012.
Consumers worldwide remain concerned about the soft labor market, personal finances, tight credit and their ability to buy things they want and need. The Asia Pacific region and the Middle East are exceptions, according to the Nielsen Global Consumer Confidence Index. Nonetheless, weak economic figures, slowing manufacturing performance and inflation in Asia, the continued debt crisis in Europe and continuing political instability in the Middle East (Syria, Iran, Israel, Gaza), combined with rising household expenses in the U.S., have affected consumer confidence.
Hopes for a sustained global recovery in the second half of 2012 weakened due to a continued Euro zone crisis. Europe will remain the center of global growth concerns over the next handful of years, with major European economies in or at the brink of recession.
China experienced its weakest GDP result in more than a decade in 2012, reaching an estimated GDP of 7.8 percent. This result stemmed mostly from a tightening in credit conditions in response to threats of a real estate bubble and weakened external demand.
Despite dealing with the difficulties imposed from the economic slowdown, China’s economy received a boost in the fourth quarter of 2012 from the accelerated approval of public infrastructure projects. This upward momentum in its economy is expected to continue in 2013 as infrastructure construction ramps up to full speed; China’s GDP in 2013 is estimated to rebound to about 8.6 percent.
In Nielsen’s 2012 third quarter survey, 62 percent of consumers around the world reported they were in a recession and half of those believe it will continue another year. This sentiment is down from 64 percent in Nielsen’s 2011 fourth quarter survey. Underlying economic conditions remain fragile in many parts of the world, which could constrain consumer confidence and spending momentum in the first half of 2013.
Fiscal cliff avoided
On an up note, the U.S. House of Representatives voted on January 1, 2013, to approve the fiscal cliff bill, which had already been passed by the U.S. Senate. According to economists, it is estimated that without the passage of the bill, economic growth would have slowed by 0.5 percent in 2013, possibly driving the U.S. back into a recession and driving unemployment from an average of 8.1 percent in 2012 back to more than 9 percent.
Although still elevated, the U.S. unemployment rate has improved to 8.1 percent in 2012 compared to 8.9 in 2011; this helped to significantly buoy consumer confidence in 2012—averaging almost 67 percent in 2012 compared with 58 percent in 2011. The improvement in consumer confidence in 2012 contributed to continued moderate expansion in economic activity during 2012. However, consumer optimism about economic conditions in the first half of 2013 remains guarded due largely to concerns about a soft labor market.
Cause for optimism
In 2012, the overall business and sales environment improved for many industry participants. Many manufacturers, even in the traditional markets, did slightly better than in 2011, especially the marine market, which bounced back from a 7 percent decrease in growth in 2010 to a growth increase of about 4 percent in 2011 and 7 percent in 2012.
Residential construction increased 14 percent—with nonresidential construction increasing 7 percent—in 2012 compared with 2011. These increases in construction enhanced sales growth prospects for awnings, fabric structures and geosynthetics.
Sales performance results in 2012 were a bit of a mix for EPMs in the U.S. fabric graphics market: some achieved single-digit growth, some were flat and some experienced a downturn in sales.
One trend that has hurt sales for U.S. fabric graphics EPMs is the advent of big box retailers beginning to use cheaper materials for their signage. The result is end products (such as banners) that are not built to last. There is also the entry into the fabric printing market by more suppliers of inks, printers and raw materials, such as vinyl.
According to the National Association of Home Builders Remodeling Market Index (RMI), consumers are a bit cautious about spending on remodeling projects for their homes; but the RMI figure for fourth quarter 2012 was 55—the highest point since first quarter 2004. The improvement in the RMI shows that the remodeling industry is making an orderly recovery from its low in 2009. Yet, the recovery of the remodeling market—and large projects in particular—continues to be constrained by tight credit and low appraisals.
The sentiment among participants at IFAI Expo 2012 was that recovery is slowly continuing. They reported small, positive gains in growth in 2011 and 2012, but the industry still lacks depth: before 2009, EPMs would place orders with suppliers for six months out or more. As in 2011, EPMs still tend to place orders out for no more than one to two months to avoid the chance of having too many goods idling in inventory.
Sales in the U.S. specialty fabrics industry increased about 2.0 percent, slightly higher than the 1.5 percent that occurred in 2011. Sales projections for highly fabricated products in the U.S. for 2013 (which includes specialty fabrics) are expected to see an increase of 2–3 percent.
Market conditions
After recent trying years, industry participants began to see better results in sales and profitability in 2012, in part due to their efforts in revamping their businesses to meet today’s challenges. Market conditions in the U.S. that have held back stronger, more sustained growth for the specialty fabrics market in 2012 continued to include:
Tight credit. Although there was slight improvement in 2012 compared with 2011, the credit lending market remains tight. Financial institutions were easing credit standards for all commercial and industrial borrowers in 2012, but at a slower pace for smaller customers—and that’s where demand for credit remains weak. Community banks across the U.S. are wary of loosening credit standards in such a restrictive regulatory environment, which obligates them to hold onto more funds to cover loans for capital.
A recent small business poll by the Federal Reserve System revealed that while many small firms were applying and being approved for credit in 2012, more than one in four small businesses report they have not applied for loans because they believe they would be turned down. The credit picture for EPMs is expected to continue to improve slightly in 2013.
Unemployment. Unemployment averaged 8.1 percent in 2012, a noticeable improvement compared with 8.9 percent in 2011. The Federal Reserve Board forecasts that U.S. unemployment figures will improve in 2013, ranging from 7.4–7.7 percent.
Raw material costs. High oil prices have kept raw material costs high as well. The average cost per barrel of oil is projected to be a little lower in 2013 ($89 per bbl.) compared with 2012 ($94 per bbl.) The effect of gas prices has carried over to some specialty fabric markets—in particular the marine fabric industry, as boat consumers tend to spend more of their money on recovers for their existing boats and less on new boats.
Imports. Incoming shipments from China and elsewhere are not going to drop anytime soon, but this may be starting to change as wages and other costs rise in China’s textile industry. China accounted for about 52 percent of the United States’ specialty fabrics import total in 2012.
Over the past year, China has raised minimum wages by 14–21 percent in key manufacturing sectors, and another estimate puts the jump in average annual Chinese manufacturing pay at nearly 12 percent over the past few years. A recent Boston Consulting Group study finds that the average productivity-adjusted Chinese pay rate, which came to only 36 percent of its U.S. counterpart in the year 2000, jumped to 48 percent in 2010, with estimates bringing it up to nearly 69 percent by 2015.
This projection looks probable, as China has already been on record calling for minimum wage increases of 13–15 percent annually over the next five years. Other things being equal, this should make inexpensive Chinese imports of the past more costly in the future.
Worldwide imports of specialty fabrics in the U.S. decreased 3 percent in 2011. Specialty fabrics imports from China into the U.S. in 2011 were down 1 percent from 2010. But as the economic situation throughout the world improved slightly in 2012, so has the import picture for specialty fabrics into the U.S.—worldwide and for China.
Specialty fabric imports into the U.S. through November 2012 were up about 2 percent worldwide and 2 percent for China. Imports of most Asian commodity specialty fabrics have adversely affected the sales and profitability of U.S. players in traditional specialty fabric markets such as tents, awnings, fabric graphics and tarpaulins. High-end markets, such as safety and technical, continue to be more insulated.
Growth in the U.S. industry increased by 2 percent in 2012. EPMs who focus on high value products and services, such as smart fabrics, safety and technical, and medical products, should achieve mid-single or greater sales growth in 2013. Industry leaders plan to allocate more funds for capital expenditures in 2013 than they did in 2012 and are optimistic about sales prospects for the future.