Monthly Market Reports

March 2012

26 March 2012

In this edition, we shed some light on the current US retail market, which is our largest single wool market. We will also continue with our recent series of ‘insight’ articles, this time focussing on polyester – one of our competitor fibres most commonly blended with 21+ micron wool in the suiting market.

Signs of recovery in our largest market?

US is by far our biggest clothing market with an estimated market value of US$314 billion, which is more than twice the size of our second largest market, China. This critical market for us was the central stage for the Global Financial Crisis which unfolded in 2008/09, and the impacts are still being felt in US economy in the shape of high unemployment rate, on-going household deleveraging (paying off debts), and loss of consumer confidence.

The chart below gives an insight into the impact the GFC has, but also, provides an insight into what has happened since – showing the value of wool apparel imports (in US$m) and the volume of imported wool units (number) for the 2008 to 2011 calendar years.

 

Note how the import values and volumes dropped dramatically in 2009 as the GFC hit, and how they have subsequently partially recovered.

The most recent trade data gives some reasons for cautious optimism that the economy is on the upswing, certainly compared to six months ago. Figures released on the 13th of March showed sales trended upwards in February, sales were lifted by special events across the three day Presidents Day weekend and Valentine’s day. An even bigger impact is the improving economy, with a survey earlier in the week suggesting US consumers were in the most upbeat mood for a year in February 2012.

National Retail Federation pointed to 20 consecutive months of sustained year on year retail growth in February. Showed retail industry sales increased 0.5% seasonally adjusted from Jan and 8.6% unadjusted year on year. Also import cargo volumes in major US retailer container ports are expected to increase 10% in March against the same period last year.

Retailers are still watching all the economic indicators very carefully, but there are enough signs of improvements in the labour market and the overall economy. Retailers only import more if they expect to sell more, so these numbers are a sign that optimism is growing, although the impact of rising fuel prices will have on the economy’s momentum remains unclear.

Wool: Polyester

Polyester is a man-made fibre, often seen in the wool industry as a blend in the production of woven wear, mainly suits and coats. To be precise, polyester is produced primarily using purified terephthalic acid (PTA) and monoethylene glycol (MEG), which is generally derived from crude oil and liquefied petroleum gas (LPG). Therefore, we expect the changes in the price of oil would explain the variation in the price of polyester.

Statistically identified, there is a strong correlation (85%) between the price of oil and price of polyester, and there is a lagged effect of 3 months (it takes roughly 3 months for an oil price change to cause polyester prices to move in the similar direction). However, recently we have seen the polyester prices tracking closely to the oil price movements, in effect shortening the lagged effect of oil price on polyester prices. The graph below shows the trends since July 2001 in the price of West Texas Intermediate crude oil and the price of polyester, currently the price of polyester is around 3 times the price of the crude oil price.

 

Uncertainty in the oil market continues to rise. Recently, EU leaders have agreed to place a restriction on Iranian oil, the US has imposed sanctions on the Iranian central bank. In response Iran is threatening to block the Strait of Hormuz, where one-sixth of the world’s oil and large quantities of natural gas passes through. There are speculations that, the supply short fall of oil from Iran will be filled by increase supply from Saudi Arabia. Nonetheless, uncertainty over the threatened closure of Hormuz, no matter how unlikely, and worries about the mechanics by which Saudi supply would replace Iranian oil in Europe, will keep upward pressure on oil prices.

So far the market has responded to the uncertainties. PCI fibre reports, it was generally hoped that the current increase in polyester stable prices would be sufficient to cover raw materials price increases, but there is now concern that a further increase will be necessary. The higher PTA and MEG prices continue to force higher prices for polyester stable fibre. Given the mixture of factors, in 2012 price pressure continues to mount on the supply chain, from processors all the way to the retailers.