An epidemic has affected many industries. The textile business has not been easy to do in the past two years. Starting from 2019, overcapacity broke out collectively, trade frictions suppressed demand, and the market began to go downhill. But I never expected that 2019 was just the beginning. In 2020, the once-in-a-century COVID-19 epidemic plunged the textile industry into an “abyss”, with demand sharply compressed and a large amount of inventory accumulated. In 2021, the overseas epidemic situation will still be severe, demand in the entire industry will be difficult to recover, and while there is still a large amount of inventory in the market, it will still be difficult to do textile business. We can’t help but ask: In a complex environment, is the domestic textile industry chain facing a new situation and turning point?
Review of the last round of substantial expansion of domestic textile production capacity
After joining the WTO in 2001, China has experienced a period of dividend development in the textile industry with its most complete cotton spinning supply chain, and has become the center of global textile and apparel.
From 2000 to 2010, the average cumulative retail sales of domestic clothing, footwear and hats grew at an average rate of 19.13%. At the same time, the cumulative export value of China’s clothing grew at an average year-on-year average rate of 14.79%. China has gradually become the main supplier and consumer of global textiles. At that time, against the backdrop of booming domestic sales and foreign trade, the cumulative total profits of the domestic textile industry grew at an average year-on-year average rate of 45.38%.
Chart: Textile and apparel sales growth rate from 2001 to 2011 (%)
Figure: Growth rate of cumulative total profits of the textile and apparel industry from 2001 to 2011 (%)
High profits further led to the expansion of production capacity. During this period, an average of 8,633,500 new spindles of cotton yarn production capacity were added annually in China. Cotton consumption once exceeded 10 million tons, and its share of global total consumption increased from 25.5% to more than 40% in 2010. . The expanded production capacity eventually led to over-investment and an inventory crisis in the textile and apparel industry through the upstream and downstream of the industrial chain.
Figure: Domestic textile industry capacity expansion from 2001 to 2011
In periods of optimism, the stocking of raw materials is increased layer by layer, bringing about false prosperity on the most upstream supply side. When optimism turns to pessimism, the most upstream supply bubble faces the most real demand squeeze.
After 2010, the high domestic and foreign cotton price differences and absolute cotton prices further squeezed the production profits of the textile industry. Labor costs and other production costs faced competition from the gradually expanding textile production capacity in Southeast Asia, and market order allocation gradually shifted to Southeast Asia. At the same time, as China’s domestic textile and apparel terminal consumption growth slows down, global textile and apparel terminal consumption has also fallen into a growth bottleneck, and the market scale growth is limited.
Domestic expansion of textile production capacity far exceeds the effective demand that the market actually needs to meet. Upstream suppliers in the industry chain still maintain relatively optimistic stocking needs, resulting in an inventory crisis. After 2011, domestic sales and foreign trade weakened rapidly, while the growth rate of fixed investment in the textile industry still maintained a growth rate of more than 10%. The new domestic cotton yarn production capacity remained at more than 10 million spindles in 2011-2012, but the inventory of the textile and garment industry showed obvious decline. Accumulated, finished goods inventory maintained double-digit year-on-year growth, while the textile industry’s profit growth rate declined rapidly.
Chart: Inventory of finished products in the domestic textile industry after 2011
Against the background of falling profits, construction starts and production capacity have experienced long-term declines and depletion. As a result, domestic cotton consumption dropped from 8.39 million tons in 2011 to 6.044 million tons in 2015. The continued weakening of the production-sales gap drove cotton prices out of the nearly five-year decline. In the environment of relocation of textile production capacity, the textile industry maintains a cautious management attitude, the growth rate of fixed investment slows down, and the inventory of finished products maintains low growth.
Figure: Changes in domestic cotton consumption based on USDA caliber
With profit support, the domestic textile industry track is once again crowded
The general trend of relocating production capacity overseas, coupled with the impact of the COVID-19 epidemic, has triggered a wave of obvious supply and demand mismatches in global textiles, which has also accelerated the pace of destocking in the domestic cotton spinning industry chain to a certain extent. The beneficiaries of this round have once again returned to the stage of transformation. of China’s textile industry. Under the impact of the epidemic, the terminal links of the industrial chain were the first to collapse. After the global store closure wave hit, it gradually affected the entire textile and apparel industry chain upwards, and the industry chain inventory once again faced inventory pressure.
The consumption of global terminal residents soon recovered under the stimulation of macro policies. However, in the face of the rebound in demand, the textile industry chain still maintained a cautious attitude, and the market showed a passive destocking state. When the major clothing consuming countries continue to accelerate vaccine promotion and liberalization, While social distancing and releasing demand, Southeast Asian textile countries are facing shutdowns due to the out-of-control epidemic. The contradiction between supply and demand of global textiles has begun to appear, and prices have begun to rise.
Figure: Year-on-year changes in inventories of U.S. apparel wholesalers
As the beneficiary of the resurgence of orders, the profits of China’s textile industry chain began to recover, which in turn stimulated the industrial chain’s mentality to pick up, and the demand for replenishment increased significantly. In October 2021, behind the substantial profits realized by the upstream Xinjiang cotton growers, we saw bottom-up profit distribution transmission, and the bullwhip effect was once again reflected on this cotton spinning industry chain spanning the whole of China. As the inventory cycle of the domestic textile industry changes from destocking to accumulating stocks, signs of textile production capacity expansion appear again with the support of profits.
According to statistics from the China Textile Machinery Association, from January to June 2021, sales of cotton spinning machines increased by 82.2% year-on-year, sales of compact spinning devices increased by 88.5% year-on-year, and sales of rotor spinning machines increased by 100% year-on-year. The three major types of knitting machinery have performed well in the market, each with different growth points. It is understood that in the third quarter of 2021, most spinning machinery companies have full tasks and good follow-up orders.
The low threshold attribute of the textile and apparel industry determines the blindness of its production operations and the disorderly expansion of production capacity. At present, with the improvement of global clothing terminal consumption, terminals have entered the stage of active replenishment. In the process of the positive demand for stocking being transmitted to the upstream, it is amplified by multiple supply and demand links in the industry chain. Therefore, the actual demand for cotton at the most upstream has been Possibly overestimated.
From the perspective of production capacity cycle, in the past ten years, domestic textile production capacity has been showing a trend of shifting to Southeast Asia. The epidemic has interrupted this rhythm. However, at present, domestic textile production capacity has significantly expanded due to the rebound in profits. From a long-term perspective, production has ultimately exceeded Effective demand determined by consumption and exports leads to overcapacity. However, the resilient domestic textile industry chain cannot be ignored. Whether the inventory crisis in the downstream of the domestic textile industry chain will be realized will become a negative point for the market in 2022. The current complex global epidemic environment still needs to be considered.
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