- Growth of the middle classes in emerging countries
- Rise of fast fashion
- Products with high price elasticity of demand
- Sector very sensitive to changes in economic activity
- Price structure very sensitive to swings in commodity prices
The textile-clothing sector is composed of two branches: textile on the one hand and clothing on the other. Although linked, the two are subject to different constraints and mechanisms. Textiles provide inputs to the clothing market, mainly cotton for natural fibres and polyester for synthetic fibres. While historically cotton and natural fibres were the most widely used, synthetic fibres, which are cheaper and easier to mix with other fibres in particular, have gained in importance: global polyester production is now twice as high as cotton production.
After increasing by 60% between January 2016 and June 2018, cotton prices fell sharply, tumbling by 30% between June 2018 and October 2019. The US Department of Agriculture (USDA) forecasts a 2.5% increase in world cotton production for the 2019/2020 marketing year compared to the previous one. It also expects demand to stagnate, which should lead to a slight increase in world stocks (+0.8%). In addition, China’s tariffs on cotton imports from the United States are putting downward pressure on prices, which are expected to decline in 2020. The Australian Department of Agriculture (ABARES) forecasts a 12% decrease in world cotton prices in 2019/2020 compared to the previous season.
Cooler global economic activity is expected to weigh on the sector as a whole this year. This is reflected in Coface’s sector risk assessment levels, with most regions considered in “high risk” or “very high risk” for textile-clothing.
The clothing market, like the retail sector, is having to contend with the expansion of e-commerce, mainly in advanced economies and China. To survive, physical shops must adapt to market changes by collaborating with companies that specialize in online sales or by developing this service internally for their customers. In the United States, for example, online sales increased by 6.7 percentage points between 2015 and 2017 to reach 27.4% of clothing sales.
Sector Economic Insights
The global economic slowdown is dimming the sector outlook
The clothing market is very sensitive to changes in economic conditions. World economic growth is expected to decline to 2.4% in 2020 from 3.2% in 2018 and 2.5% in 2019. The economies of the main clothing consumption markets, notably the United States and China, are therefore expected to experience a slowdown in activity in 2020. Coface forecasts 1.3% growth in 2020 after 2.3% in 2019 for the United States, and 5.8% after 6.1% and 6.6% for China. This sluggish growth trend is already driving clothing sales down: in the United States, YoY growth of the three-month average for clothing sales was flat in September 2019 (+0.1%) compared to a 5.1% increase a year earlier. In Europe, the same indicator fell by 1.3% in August 2019 compared to 0.7% a year earlier. It also fell in China (-8.7% in September 2019), although at a slower pace than a year earlier (-26% in September 2018). The sector in Latin America is highly dependent on imports of clothing products from Asia, particularly China. The expected downturn in activity should therefore affect demand for Latin American clothing. Clothing sales in these regions, like global clothing sales, are expected to continue to suffer from the economic slowdown. However, this effect could be partially offset by the fall in cotton-based clothing prices, linked to the downward trend in cotton prices.
The textile-clothing sector is rapidly evolving
The textile-clothing sector is evolving under the influence of various factors. One key factor is the growing use by sector participants of synthetic fibres (mainly polyester) at the expense of natural fibres such as cotton. Polyester has several advantages over cotton: its production requires less water than cotton and no pesticides. It is also easier to handle and mix with other fibres, and its production is less subject to climatic hazards. Another important point is the major development of environmentally-friendly natural fibres, driven by the growing environmental concerns of consumers.
As demand for clothing from Asia, particularly China, grows, the importance of Europe and North America in this sector is decreasing. Accordingly, sales of clothing products outside North America and Europe equalled sales in these regions in 2018 and are expected to reach 55% of total world sales of clothing products in 2025.
Another important transformation in the clothing market is the growing importance of fast fashion, particularly in advanced economies and China. The term refers to the strategy used by brands, which seek to change their clothing collections very quickly in order to stimulate and increase the frequency of consumer purchases. A direct consequence of this evolution is the shorter lifespan of clothes, which are now kept for half as long as they were ten years ago.
Textile manufacturing, particularly low value-added manufacturing, is shifting from China (which dominates textile manufacturing worldwide) to other economies with lower production costs, including Vietnam, India and Bangladesh. Recently exacerbated by the trade tansions between the United States and China, this trend is expected to continue as Chinese wages rise, pushing up production costs.
The trade tensions between the United States and China are having a negative impact on the sector
The trade tensions between the United States and China are impacting the entire global value chain of the sector. China’s tariffs on US cotton led to a 38% year-on-year decrease in US cotton exports to China over the November 2018-October 2019 period. Furthermore, US targeted many apparel goods from China with the successive waves of tariffs.
Coface anticipates that the trade tensions between the United States and China will severely affect American consumption of clothing products. The duties imposed on imports of these products will partly be passed on to consumers as partial cost increases that are fed into sales prices. However, the increase in the cost of importing clothing into the United States from China is also partly due to the tariffs China has imposed on American cotton, as the cost of importing cotton is going up for Chinese factories. Thus, the trade tensions have complex consequences that vary for different participants in each country. The US textile-clothing sector is expected to be hurt by the trade war, regardless which option is taken by China. If China continues to scale back imports of US cotton, the income of US cotton producers will decline. If China decides to increase imports despite the customs duties, US clothing consumers and retailers will be hit. At this stage, Coface expects that China will continue to import smaller volumes of cotton without halting imports completely, thus affecting both consumers of clothing products and American cotton producers. However, the decrease in China’s imports could be offset by other countries, in particular Vietnam, which in 2018 was the largest importer of American cotton (21% of exports), ahead of China, and whose imports of American cotton increased by more than fivefold between 2010 and 2018, climbing 23% per year on average.
Higher cotton stocks and production are expected to drive prices down
After imposing cotton import quotas following the accumulation of record stocks in 2014/2015, amounting to 62% of the global total at the time, China decided to raise its cotton import quotas to meet growth in domestic demand caused by the increase in disposable income. As a result, the USDA forecasts that Chinese cotton stocks will be halved in 2019/2020 compared to 2014/2015 and account for 40% of world stocks. The United States will find it hard to take advantage of the increase in import quotas because of the trade tensions, unlike India, the world’s leading producer and third-largest exporter, who already benefited in 2019 from stronger demand from China following the reduction in its imports from the United States. Nevertheless, the increase of stocks in the United States and India will offset the decrease in China; the USDA forecasts world stocks to slightly rise (+0.8%) at the end of 2019/2020. This should put deflationary pressure on cotton prices, which are already on a downward trend (-30% between June 2018 and October 2019).
US cotton production is expected to increase by 10% in 2019/2020, chiefly due to a base effect, since production in 2018/2019 was particularly poor (-12.2% compared to the previous season) owing to bad weather conditions. In India, the increase in land under cultivation and improved yields due to higher than normal monsoon rainfall will result in a 14.3% increase in cotton production compared to 2018/2019. As a result, world production is expected to increase by 2.5% in 2019/2020.
Last update : February 2020