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.

Apparel - - CONTENTS OCTOBER 2018 -

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.

CHANG­ING PAT­TERNS

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.

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