Looking At The Global Clothing CPI, The Cold Winter Of Textile Industry Is Coming

At present, the cotton price continues to fall below the processing cost, leading to the processing profit has not been effectively restored, behind is the loss of discourse power in the game between cotton ginning capacity and downstream textile industry. Therefore, we have to think about the other side of the game, that is, spinning, weaving, printing and dyeing, clothing, the essence of the textile industry - fiber from chemical workshop, farmland, ranch to fashion industry long processing link.

In the past two years, we have ushered in the recovery and return of domestic cotton textile industry profits. However, throughout the global clothing CPI, its growth rate is stable and low in the long run. Therefore, the main driving force of this round of profit growth is the return of Southeast Asian orders to China under the recovery of clothing consumption after the global epidemic.

Behind the optimism, cotton farmers realized their planting profits substantially in October this year, and we saw the bottom-up transmission of profits in the industrial chain. With history as a mirror, from the perspective of cycle: spring is far away, winter may be coming.

The last round of domestic textile capacity expansion: over investment and bullwhip effect

After China's entry into WTO in 2001, China has experienced a period of dividend period of textile industry development with the most perfect cotton textile supply chain, and has become the global textile and clothing center.

From 2000 to 2010, with the increase of per capita disposable income, the cumulative retail sales of domestic clothing, shoes and hats generally reached double-digit range in this period, with an average growth rate of 19.13%. At the same time, the average growth rate of China's clothing exports was 14.79%. China gradually undertakes the main supplier and consumer side in the global textile market. While the global market cake becomes larger, the domestic textile and clothing industry also gets most of the cake. Under the background of booming domestic and foreign trade, the total accumulated profit of domestic textile industry increased by 45.38% on average year-on-year.

High profits have also led to further expansion of production capacity. During this period, the domestic production capacity of 8.6335 million spindles of cotton yarn was increased annually, and the cotton consumption exceeded 10 million tons, accounting for more than 40% of the global total consumption from 25.5% in 2010. The expansion of production capacity eventually leads to over investment, and through the bullwhip effect of the upstream and downstream of the industrial chain, the inventory crisis of the textile and garment industry is formed.

Because production and consumption are separated in time, space and main body, it is difficult to realize the perfect matching between production capacity investment and final demand. The theory of over investment holds that when the economy is booming, investors are too optimistic about the future and continue to increase investment, which eventually leads to production exceeding the effective demand determined by consumption and export, leading to overcapacity, or capacity expansion exceeding the bottleneck of raw materials or labor supply, and the rise of wages and raw material costs erodes the profits of production enterprises.

If there is a mismatch between supply and demand caused by excessive investment in one supply and demand node, the fluctuation caused by the mismatch of supply and demand in the cotton textile industry chain connected by multiple supply and demand nodes is more severe. In the optimistic period, the raw material stock increases layer by layer, which leads to the false prosperity of the upstream supply side. While the optimism turns to pessimism, the upstream supply bubble is facing the most real demand squeeze.

The development dividend period of nearly 10 years ushered in extreme optimism after the 2008 financial crisis. With the reversal of macro expectations, the terminal consumer market recovered rapidly. After experiencing the low-speed growth in 2008 and the negative growth in 2009, the export value of clothing returned to double-digit growth again in 10 and 11 years, while the domestic consumer market remained stable and maintained double-digit growth, Only in 2009 did it decline slightly.

After 2010, high internal and external cotton price difference and absolute cotton price further squeezed the production profit of textile industry. Labor cost and other production costs were facing the gradually expanding textile production capacity competition in Southeast Asia, and the market order allocation was gradually transferred to Southeast Asia. At the same time, as the growth rate of domestic textile and clothing terminal consumption slows down, the global textile and clothing terminal consumption also falls into the growth bottleneck, and the market scale growth is limited.

At the same time, under the effect of the bullwhip effect, the upstream suppliers in the industrial chain still maintain a relatively optimistic stock demand, resulting in 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 domestic new cotton yarn production capacity was maintained at more than 10 million spindles in 11-12 years. However, the inventory of textile and clothing industry has accumulated significantly, and the inventory of finished products has maintained a double-digit growth year-on-year. At the same time, the profit growth rate of textile industry has declined rapidly.

Over investment and bullwhip effect not only make domestic textile and garment industry fall into inventory crisis. In the context of lower profits, the start-up and production capacity have experienced a long-term decline and elimination. As a result, domestic cotton consumption decreased from 8.39 million tons in 2011 to 6.044 million tons in 2015. The continuous weakening of production and sales gap drove cotton prices out of the decline of nearly five years. In the environment of textile production capacity moving out, the textile industry maintains a cautious attitude, the growth rate of fixed investment slows down, and the inventory of finished products maintains a low growth rate.

Profit plus, domestic textile industry track again crowded

The trend of production capacity outward migration was impacted by the new crown epidemic, which caused a wave of obvious mismatch between supply and demand of global textiles. To a certain extent, it also accelerated the pace of domestic cotton textile industry chain de stocking, and the beneficiaries of this round returned to China's textile industry at the time of transformation. Under the impact of the epidemic, the terminal link of the industrial chain first collapsed. After the global tide of shop closures, it gradually transmitted upward and affected the entire textile and clothing industry chain, and the inventory of the industrial chain was facing inventory pressure again.

The consumption of global terminal residents recovered quickly under the stimulation of macro policies. However, in the face of the recovery of demand, the textile industry chain still maintained a cautious attitude, and the market showed a passive state of going out of stock. While major clothing consuming countries continue to speed up the promotion of vaccines, open social distance and release demand, Southeast Asian textile countries are facing shutdown due to the out of control epidemic situation, Global textile supply and demand contradiction began to appear, the price began to rise.

As the beneficiary of order return, the profits of China's textile industry chain began to recover, thus stimulating the industrial chain's mentality to warm up, and the demand for replenishment of stocks increased significantly. In October 2021, after the cotton growers in Xinjiang, the most upstream, realized their profits substantially, we saw the bottom-up transmission of profit distribution, and the bullwhip effect was once again reflected in the cotton textile industry chain across China. In the domestic textile industry inventory cycle from the stock to the accumulation of the conversion, profit plus, textile capacity expansion signs appear again.

According to the statistics of China Textile Machinery Association, the performance of cotton spinning related textile machinery industry this year is very optimistic. From January to June 2021, the sales of cotton spinning frame, compact spinning device and rotor spinning frame increased by 82.2%, 88.5% and 100%, respectively. The market performance of the three types of knitting machinery is good, with different growth points.

In the first half of the year, the production and sales of circular weft knitting machine industry were booming, and some enterprises had been overloaded with sales increasing by 70.6% year on year. Warp knitting machine industry in the first half of the year as a whole stable and good, sales increased 29%. In the first half of 2021, the sales volume of flat knitting machine industry increased by 220% year on year. It is understood that in the third quarter of 2021, most spinning machinery enterprises are full of tasks and follow-up orders are good.

The low threshold attribute of textile and garment industry determines its blindness of operation and production and disorder of capacity expansion. At present, with the improvement of global clothing terminal consumption, terminals have entered the stage of active replenishment. In the process of the positive transfer of goods preparation demand to the upstream, it is amplified by multiple supply and demand links in the industrial chain. Therefore, the actual demand for cotton in the most upstream may be overestimated.

From the perspective of capacity cycle, domestic textile production capacity has been shifting to Southeast Asia in the past decade. The epidemic has interrupted this rhythm. However, the domestic textile production capacity has obviously expanded due to the recovery of profits. From a long-term perspective, production eventually exceeds the effective demand determined by consumption and export, which leads to overcapacity. However, we can not ignore the domestic textile industry chain with resilience. Whether the inventory crisis in the downstream of the domestic textile industry chain will be realized or not will become a negative point of the market in 2022, we still need to consider the current global complex epidemic environment.