Textile sector anticipates global demand rebound

17 June 2023, Mumbai

The textile sector is on the brink of a remarkable turnaround following a challenging year characterized by various obstacles. 

The industry is poised for a revival in demand, especially during the third quarter of FY24, as global retailers take measures to reduce their excessive inventories and commence placing orders for the anticipated Summer/Spring 2024 collections. 

What all you need to know

Revival in demand expected

Experts in the field are optimistic about the sector's future, attributing this positive outlook to favorable market conditions, such as the geopolitical uncertainties faced by competitor countries. 

This factor is expected to infuse vitality into the textile industry, leading to sustained growth in earnings and improved cash flows for textile players.

Cautious optimism

The global textile industry is expected to experience a surge in demand, particularly in luxury apparel and footwear, with a projected 16% growth, according to McKinsey. 

From April to December 2021, the combined exports of textiles, apparel, and handicrafts reached $29.8 billion, compared to $21.2 billion in the same period the previous year. 

While the textile-clothing sector is benefiting from this rebound, it has been negatively impacted by reduced demand resulting from the global financial crisis and the Ukraine war. 

The International Textile Manufacturers Federation (ITMF) has identified "weakening demand" as the primary concern in the global textile value chain since July 2022.

Performance

With the completion of capital expenditure projects, textile companies will shift their focus toward reinforcing their balance sheets and optimizing return ratios. 

Furthermore, the decline in cotton and crude prices is anticipated to bolster profit margins and enhance India's competitiveness in international export markets. Remarkably, the textile sector has already made significant strides in capturing market share in key export markets, particularly in the realms of garments and home textiles.

Geopolitics

The potential for a UK free trade agreement and the implementation of the China+1 strategy serve as additional catalysts, augmenting the sector's prospects for realigning earnings and multiples. 

Sharekhan, a leading brokerage firm, has upgraded its outlook on the textile sector, now categorizing it as 'positive.' Notably, Sharekhan has identified Gokaldas Exports, KPR Mill, Himatsingka Seide, and SP Apparels as its preferred picks within the sector.

Tailwinds

The implications of this projected revival are significant, as the textile industry plays a pivotal role in the global economy, providing employment opportunities and driving economic growth. As demand rebounds and market conditions improve, the sector is poised to generate substantial revenue, contributing to overall economic recovery. 

The resurgence of the textile sector is a positive indicator for stakeholders, investors, and the broader business community.

Although the end-user demand graph may be nearing the peak of the same period last year, it remains to be seen if this growth in fabric demand can be sustained throughout the season. 

EAP view

The East Asia and Pacific (EAP) region is expected to experience better growth figures, projected at 4.3% in 2023, as pandemic-related restrictions are lifted and business activity in China gradually recovers.

Disruptions

The printing and dyeing textile industry has faced challenges due to the substantial increase in production costs, leading to price hikes to recover losses. The rush to complete old orders while receiving new orders after the Spring Festival has also created confusion in the supply chain for dyeing factories.

China Diary

A report by CCF Group, a premier consultancy in China, highlights some important facts about China's current growth in the apparel segment. Firstly, exports are expected to be difficult to improve in the first half of 2023, and the performance in the second half will depend on the destocking situation in overseas markets. 

Secondly, the sustainability of this demand hike remains unclear, and maintaining the upward trend may prove challenging. 

Additionally, the upcoming autumn/winter demand is expected to be slow due to unused inventory from the previous year, resulting in high intermediate inventory levels until the May-June season concludes.

Growth levers; China's domestic fabric demand for the spring-summer season arrived earlier than expected in February, but demand for seasonal fabrics remains unreliable and unsustainable. 

In the first half of the year, textile demand is mainly divided into three categories: export demand, seasonal fabric demand, and autumn and winter fabric stock preparation demand. 

However, compared to the current good demand, there is poor demand for autumn and winter stock preparation in the first half of 2023. The pandemic disrupted logistics in Guangzhou, leading to a missed opportunity for winter sales.

Currently, business is picking up in China's largest apparel wholesale markets, such as the Shisanhang Garment Wholesale Market in Guangzhou and the Sijiqing Costume Market in Hangzhou, after the pandemic disruptions. 

Challenges & opportunities; However, even during the Spring festival in February, there was a relatively low sales boost, as factories were closed and workers had returned home due to COVID-19 infections, resulting in fewer spring clothes available in the Guangzhou market.

Imbalance; The CCF report also highlights the disparity between the textile markets in East China and South China. The South China market shows stronger demand, driven by significant replenishment demand after the Spring festival and a rebound in seasonal demand for the first half of 2023. 

In contrast, the East China market lacks spring apparel, as brands typically prepare summer apparel directly in Guangzhou. Furthermore, the South China market benefits from low cotton yarn prices, even though the cotton industry chain experienced a decline the previous year.

China's Textile Industry: Rebounding Strongly in Guangdong

China's textile industry is experiencing a remarkable recovery after the pandemic, particularly in the Guangdong area.

This resurgence not only revitalizes domestic operations but also drives China's outbound investments in the textile and apparel sector. With investments surpassing $6.7 billion between 2015 and 2020, China aims to solidify its position as a key player in the global textile market. The rebound of China's textile industry carries significant implications for the global economy and trade dynamics.

Improved End-User Demand in China's Domestic Market

China's textile industry demonstrates signs of improvement in end-user demand, especially within the domestic market. 

Analysts eagerly await the first-quarter results of China's textile demand in 2023, expected to show improvement compared to the latter half of 2022. However, sustaining this growth throughout the season remains uncertain.

Export Challenges and Slow Autumn/Winter Demand

China's apparel segment faces challenges in enhancing exports during the first half of 2023, depending on the destocking situation in overseas markets. 

Boost in Domestic Demand and Market Disparities

China's major apparel wholesale markets, such as the Shisanhang Garment Wholesale Market and the Sijiqing Costume Market, experience a surge in business activities.

The South China market demonstrates stronger demand driven by post-Spring Festival replenishment and rebounding seasonal demand.

In contrast, the East China market lacks spring apparel but exhibits a well-performing cotton yarn market.

Uncertain Outlook for Seasonal Fabric Demand

While China's domestic fabric demand for the spring-summer season arrived early, the sustainability of seasonal fabric demand remains uncertain. 

However, the first half of 2023 lacks substantial autumn/winter stock preparation, contrasting with the current positive demand. 

China's Economic Rebound Driven by the Service Sector

China's economic rebound in 2023 relies on the service sector as the primary driver.

The recovery is expected to be less substantial than in 2021 due to a challenging global growth environment and a persistent property market downturn. 

Nevertheless, a mechanical increase in the year-over-year statistic and the rise of the service sector contribute to the projected 5.3 percent growth in China's GDP in 2023.

Impact of Rising Inflation on Global Supply Chain

China's reopening is unlikely to significantly alleviate constraints on the global supply chain. Sluggish global supply networks have been a major factor in rising inflation since 2021. 

While improved international shipping rates and delivery times indicate easing supply chain stresses, a general slowdown in demand and a shift towards less trade-intensive services have impacted exports from Asian economies. 

China's increased oil consumption, primarily driven by the services sector, is expected to raise global oil prices and contribute to higher global consumer price inflation.

Macro-Prudential Policies in Response to Inflationary Pressures

The increased inflationary pressures pose challenges for monetary policies globally, potentially leading to tighter monetary policy and slower economic development. 

Central banks have already raised interest rates to counter strong inflation, and price pressures are expected to remain high. This tight monetary policy may result in slower economic growth and longer or deeper recessions in some economies.

Post-COVID era

The post-Zero COVID lockdown phase brings unpredictable demand for the upcoming seasons, and it remains to be seen if China will regain its former glory in the global apparel export segment. 

The first quarter of 2023 is eagerly anticipated by analysts as they await the results of China's textile demand. 

There are some signs of improvement in textile end-user demand compared to the second half of 2022, particularly in the country's domestic market.

The textile sector worldwide is preparing for challenging times ahead, as the impending recession in the Western world, compounded by the pandemic and geopolitical tensions, disrupts supply chains, drives up raw material prices, and reduces demand.

SouthAsia view

Countries heavily reliant on textile exports, such as Bangladesh, India, and Pakistan, are particularly affected. Bangladesh, known for its readymade garments and textiles, is facing challenges due to a decrease in demand, affordability of raw materials, unfavorable trade policies, and internal security concerns. 

Bangladesh is considering diversifying into the growing global home textiles segment to mitigate the impact on its sinking sector.

India, with its skilled manpower and comparatively lower production, remains perpetually competitive in the textile world.

The textile sector is poised for a turnaround

Sum & substance; The textile sector's challenging year is giving way to a promising future. 

With a projected revival in demand, enhanced market conditions, and the potential for recalibrating earnings through strategic agreements and initiatives, the industry is set to experience sustained growth and improved financial performance. 

The upgraded outlook by Sharekhan reinforces this positive sentiment, highlighting specific textile companies as preferred investments. As the sector weaves its new story, it promises to be an essential driver of economic recovery and prosperity.

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