–China, India Labor Costs Seen Continuing to Rise
–Moderating Cotton Prices Help Offset Wage Increases
–Rising Oil Prices Add to Cost Pressures

By Jon Hurdle

PHILADELPHIA (MNI) – U.S. apparel prices rose in December and are
likely to increase further this year in response to higher wages in
producing countries, and rising costs for oil and some raw materials,
although cotton costs are expected to moderate, trade associations and
industry analysts said.

Major brands have mitigated double-digit cost increases by
suppliers in countries such as China and India but have passed some of
the higher costs on to customers whose clothing bills may be rising by
5% or more, they said.

Sharper apparel price gains are being offset by a slowdown in
cotton prices thanks to a world surplus of the crop, although the
Chinese government is preventing a further moderation by buying up much
of the surplus.

Manufacturers face costs that have risen 10-15% in the last 18
months, and are expected to rise another 10% in 2012, said Nate Herman,
vice president of international trade for the American Apparel and
Footwear Association.

About three to four percentage points of the cost increase is
likely to be passed on to customers as manufacturers seek ways of
cutting internal costs rather than raising prices at a time of uncertain
consumer demand, Herman said.

“They are afraid that consumers won’t be willing to bear the price
increases and that people will just stop buying altogether,” he said,
pointing to deep discounts offered by some retailers toward the end of
this year’s holiday shopping season.

“Until the economy fully recovers, there’s a concern that you just
can’t pass on cost increases,” he said.

The higher costs are being driven in part by higher wages in Asia,
especially China, which supplies 40% of America’s apparel, and where
labor costs have tripled in the last three years. Vietnam, the
second-largest supplier of clothing to the U.S. market, with 8% of the
market, is also seeing higher wages amid rising inflation.

Until the end of 2009, low-wage economies in Asia helped to create
deflation in apparel prices, which declined by 2-5% a year
between 1998 and 2009, Herman said.

With crude oil prices at an eight-month high, apparel manufacturers
also face rising transportation costs and delayed deliveries of imports
from Asia as shipping companies seek to reduce fuel costs by sailing
more slowly across the Pacific.

Apparel costs and prices are also being driven up by a broad-based
rise in the cost of materials, including cotton and other fabrics.
Although cotton prices are expected to moderate this year, they are
still 60% higher than they were two years ago, boosting demand
for polyester and other manmade fabrics that can substitute.

Cotton Inc., a trade association, said world cotton prices, an
important determinant of overall apparel prices, are expected to show a
slower rate of increase in coming months in response to a surplus
following over-planting in the 2010-2011 crop year, and weak economic
growth in some consuming countries.

“There was a world-record crop,” said the association’s senior
economist, Jon Devine. “That’s the big reason why prices have dropped
down.”

The group projects production will exceed consumption by 12.1
million bales, the third-biggest surplus on record, in the 2011-2012
crop year ending July 31. With broadly stable production, the expected
surplus is largely driven by a projected 2.9-million-bale decline in
world consumption, led by India, China, Turkey, Brazil, Bangladesh and
the United States.

March cotton futures on the New York Mercantile Exchange traded at
96.45 cents a pound on Jan. 11 compared with an all-time peak of $2.43
in the benchmark “A Index” in March, 2011.

Further price declines are being prevented by the Chinese
government which has bought at least 8.8 million bales, Cotton Inc.
said.

“With this cotton being withheld from the market, Chinese
government purchases likely have served as a mitigating force
counteracting some of the downward pressure put on prices by the
combination of a record global harvest and weak mill demand,” the
association said in a mid-December commentary.

Herman agreed, saying the Chinese government is believed to be
buying cotton at an above-market $1.10 a pound, underpinning prices.
“They are buying up the surplus,” he said.

Cotton Inc. said although the Chinese purchases represent about
three-quarters of the surplus, it may be difficult for them to support
prices because demand is weak and some big producers like India are
moving increasing supply on to the world market because they have
limited warehousing capacity.

In the 2012-2013 crop year, prices may begin to recover as farmers
plant less cotton in response to current low prices. The International
Cotton Advisory Committee, an intergovernmental association of cotton
producing, consuming and trading countries, projects an 8% reduction in
planted cotton acreage during the year.

Gary Raines, chief economist at FC Stone Fibers & Textiles, a
commodity risk-management firm in Nashville, said he expects continued
moderation in cotton prices this year but that could change if economic
growth is faster than expected in consuming countries, especially in
Europe.

Inventories are tight, and that means prices could jump if demand
turns out to be stronger than expected.

“Even a modest uptick in demand will be felt fairly quickly,”
Raines said.

Bob Copeland, senior vice president for business development and
product strategy at Tradecard, a supply-chain platform for brands,
retailers and suppliers, said apparel costs and prices will rise further
this year but at a slower rate because of the moderation in cotton
prices.

A growing middle class in former low-wage economies such as China
and India — which are themselves becoming markets for the apparel — is
bound to keep upward pressure on wages in those countries this year,
said Copeland, whose clients include apparel brands such as Perry Ellis
and Abercrombie.

Some brands seek to keep costs down by moving manufacturing to
Asian countries such as Bangladesh or Cambodia where labor costs are
still low, while others sign longer-term contracts with suppliers in
return for lower unit costs, Copeland said.

Through such measures, most companies manage to keep cost increases
down to between 5% and 10% a year compared with the 10-15% that many
face initially. But many have been unable to avoid passing the remaining
costs to consumers, as shown by the 4.8% annual rise in the CPI’s
apparel index for November.

Higher wages and materials costs will keep raising apparel prices
this year although perhaps not as sharply as in 2011, thanks to the
slower rise in cotton prices, Copeland predicted.

“We certainly see continued pressure on labor costs and raw
material costs,” he said.

Editors’ note: Reality Check stories survey sentiment among
business people and trade associations. They are intended to complement
and anticipate economic data and to provide a view into specific sectors
of the economy.

The U.S. Labor Department is scheduled to release the Consumer
Price Index for December at 8:30 am eastern time on Jan. 19

The CPI is expected to rise 0.1% in December after holding steady
in November, according to the median estimate in MNI’s latest survey of
economists. Energy prices are expected to decline further in the current
month after plunging in November. The core CPI is expected to also rise
0.1%.

** Market News International **

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