Harsh Winter in Store for Winter Wear Brands?
With the price of wool rising exponentially across the globe, Samir Alam analyses the future of the winter wear market.
Analysing the future of the winter wear market in the midst of rising wool prices
As the torrential monsoon begins to fade away from the subcontinent, consumers across the nation are beginning to look fondly towards the approaching winter. From the temperate seaside chills of the coasts to the bitter dry cold of the north to the misty cloud-covered hill stations in the south, India has diverse climates for diverse fashions all round the year. However, as consumers unsuspectedly wait for their fall/winter shopping spree, traders are being driven to anxiety as the price of wool in the global marketplace has risen 180 per cent over the last two years, dashing their hopes for a profitable winter.
THE STATE OF THE SECTOR
India is not only the seventh largest producer of wool in the world but also a large consumer as well. With a global production share of nearly 1.8 per cent, India consumes nearly 135 million kilograms of wool every year. This figure is on a rapid rise, with the Textile Ministry projections estimating a rise of 24.42 per cent compounded annual growth rate to reach 260 million kilograms by 2020. With their sizeable wool production capacity, states like Haryana, Rajasthan, Uttar Pradesh, Maharashtra, Gujarat and Punjab lead the nation in wool production as well as sourcing for export.
But given the global demands, these states are also highly inclined towards exports, even more so as they possess not only the raw material but also the manufacturing capacity, a large skilled and low-cost labour force, and positive trade relations with major markets. This unique ability to follow the value chain of woollen products end-to-end positions India in an advantageous position when it comes to selling woollen products and goods.
In addition, India’s long-standing trade tie-ups with regions like the US, Europe, Middle East, Latin America, South East Asia, and East Asia make for a steady market. During the 2017-18 period, exports of woollen yarn and related materials were valued at over US$798 million. However, this was a fall of nearly three per cent from the 2016-17 figures that were indicating a subtle change in trade patterns. While this offset can be balanced by the appreciating value of the dollar, from an exporter’s perspective it indicated that there was
a slight dampening of demand in the global market.
Traditionally, the core fundamentals of the woollen industry have remained strong and stable. Due to these reasons, Indian businesses have targeted the global market more aggressively, not shying away from importing raw wool to satisfy the domestic demand. In 2016-17, India imported nearly US$408 million in woollen products, which rose sharply over the next year to over US$472 million–a 16 per cent rise in one year. This spike, combined with the falling exports, suddenly paints a new picture for the Indian woollen sector. With millions in imports from Italy (US$40.62 million), the UK (US$30.01 million), Japan (US$19.04 million), Korea (US$16.57 million), the US (US$7.53 million) and Bangladesh (US$5.65 million), it becomes very clear that the predictable pattern of trade has shifted. The major reason behind this flip was not the trade war or currency fluctuations, but in fact the role of Australia in the global woollen trade.
RIPPLE EFFECT FROM DOWN UNDER
Australia is the world’s largest producer and exporter of wool, mainly due to its highly prized merino wool variety. With an exceedingly mature industry that has employed high levels of animal husbandry techniques, Australia’s wool quality is in high demand across the world. And with over 75 million fine-wool sheep being reared, it has been able to meet this demand maintaining a quality over price advantage against competing nations for the longest time. In 2016-17, it is estimated to have exported over US$3.16 billion in wool, with a sharp 13 per cent hike the following year to US$4.1 billion in exports.
This massive surge in exports was mainly due to the rise in demand coming in from China. In fact, the Asian giant was the sole source for over 78 per cent of Australia’s exports, especially in the refined high quality segment which merino wool is known for internationally. As a result, the price of wool achieved a gradual rise over the last two years until the sudden surge this year. Over the course of mid-2017 to July 2018, wool prices rose by 45.7 per cent, reaching nearly US$11.73 per kilogram–the highest since 2011.
However, despite the natural balance between the rising demand from China and Australia’s steady supply, there have been recent setbacks that have altered the state of trade. Australia has been facing a drought this year, and leading industry analysts like Rabobank have projected a two per cent decline in supply for the coming year. And this is only the start. With limited grazing for sheep, the odd side effect is that the animals only produce finer wool which is in demand at a premium due to its higher quality, further increasing prices.
INDIA CAUGHT IN THE COLD
And despite the prices rising, there has been no lull in the demand coming from China, further exacerbating the global pricing situation. China’s annual consumption of raw wool is nearly 4,004,00,000 tonnes as it is the world’s largest woollen product manufacturer, both for exports and domestic consumption. But due to its limited domestic production of about 1,00,000 tonnes, it relies on massive imports to meet its needs. And with a growing luxury market, these rising prices pose little barrier for China to continue its exports and domestic consumption unhindered. In fact, Chinese domestic consumption of wool has changed radically over the last 10 years, moving from cheap synthetics to high-value woollens. Under these circumstances, Australia’s annual exports to China play a critical role in the latter’s economic plans, which see no signs of slowing down their import requirements, thereby keeping global prices high.
Makers in the knitwear industry have already experienced a 70 per cent price rise in India. Meanwhile, worsted fabric makers in particular are facing another challenge from the domestic market when it comes to price sensitivity. Indian consumers are unwilling to pay for high-cost end products, which then places the burden on the manufacturers who have no choice but to slim their margins considerably to ensure sales. Major players in the Indian market such as Indo worth, Jayashree Textiles, OCM, Raymond, Reid & Taylor and Reliance Industries are exploring other ways of avoiding these outcomes. These companies are quickly shifting from polyester wool to polyester viscose to soften the impact of the rising wool prices and to save their margins. However, it is too early to know if this strategy will work with consumers and give desired results.
A WARM FUTURE?
It is clear that the Indian woollen industry is feeling the impact of numerous global factors at a cross section. While the domestic industry laments and the exporters rejoice, it is important to note that this cascade of events is rooted in global environmental factors. The drought in Australia has its roots in climate change and easily demonstrates how a seemingly isolated climatic devastation can have far-reaching consequences. So, even as traders lament the effects of cheap imports from Bangladesh and China, the root causes are clear to see. The global apparel and textile trade is rooted to the environment in inextricable ways and dismissing the potential dangers of climate change to economic interests is a risk that no one can afford to take.