Slowdown in the First-8-Months Profit Growth of the Textile Industry

Slowdown in Profit Growth

According to data collected from statistics-worthy Chinese textile enterprises surveyed by National Bureau of Statistics of China, from Jan. to Aug., 2010, the total profits reached CNY128.649 billion, up 52.42 per cent y/y, 40.14 percentage points higher than the Jan.-Aug. 2009 period, but 22.17 and 8.69 percentage points lower than the Jan.-Feb. 2010 and Jan.-May 2010 period respectively.

The growth was attributed to an increase in domestic sales, improvement in industrial structure and low base figure recorded in the same period of last year. It is important to note that, although substantial progress has been achieved in the beginning of 2010, the textile industry this year later will face more pressure and gives weak outlook for Q4.

The average monthly profit in Jan.-Mar. 2010 was 43.41 percentage points higher than the Jan.-Feb. 2010 period; and the average monthly profit in Jun.-Aug. 2010 was 15.62 percentage points higher than the Mar.-May 2010 period. The decline was attributed to seasonal changes and low base figure recorded in the same period of last year. Besides, yuan appreciation and the increase in labor costs were also seriously eating into textile company's profits.

Cotton textile leading the profit

Looking further, the ratio of the profit growth of cotton spinning sector/the profit growth of total textile industry was 33.40% in Jan.-Aug. 2010, which says that cotton spinning sector led the profit.

The profit of Chinese cotton spinning sector soar 66.45 percent to CNY 37.015 billion in Jan.-Aug. 2010 period. With manufacturing slowly recovering amid improving economic conditions, cotton demand has increased prompting more orders among mills. However, with a deficient supply of cotton in the market, prices extend gains since the beginning of 2009. In Aug., the monthly average price for 32 S cotton carded yarn reached CNY 26,411 a ton, adding 41.26% over the average price of 2009. This, along with higher sales volumes, led to improvement in the operating profit margins of most large spinning mills. According to the data, the export value of Chinese cotton yarn and cotton fabric soar 28.83% and 40.71% respectively in the first eight of 2010.

Undoubtedly, the textile industry this year will face more pressure. The growth in the beginning of 2010to a certain extent was attributed to low base figure recorded in the same period of last year. However, the appreciation of the yuan, together with rising raw material and labor costs will continue to squeeze profit margins in China's textile industry.

Cotton prices have been increasing at an unprecedented level in China. Prices have been going up internationally as well. Cotton spinning mills face a challenging environment in high purchasing prices where it may be difficult to pass higher material costs on to higher yarn prices.

The appreciating yuan in China could also spell serious trouble for the Chinese textile industry as it will further slash the marginal profitability of China's textile makers. The yuan rose 21 percent against the US dollar from 2005 to 2008. This has made Chinese textile products more expensive, thus the price advantage has almost vanished compared with textile products from Vietnam, Indonesia and other Southeast Asia countries. Since Chinese textile companies are facing rising labor costs, further appreciation of the yuan will make the situation even worse.

Moreover, 2010 is an opportune time as China's 11th five-year plan (2006-2010) is drawing to a close, and officials are preparing the groundwork for the 12th five-year plan. Environmental protection is given the top priority. The new five-year plan aims to reduce carbon intensity C carbon emissions/unit GDP C up to 45 percent by 2020, when 15 percent of its energy use will be non-fossil fuel. It also aims to reverse deforestation by increasing the total forest cover by 40 hectares and increasing the total forest stock volume by 1.3 billion m3. As we know, the textile industry has a big pollution problem. The World Bank estimates that 17 to 20 percent of industrial water pollution comes from textile dyeing and treatment. They ve also identified 72 toxic chemicals in our water solely from textile dyeing, 30 of which are cannot be removed. This represents an appalling environmental problem for the clothing designers and other textile manufacturers. That said, pollution could be a major hurdle for textile and apparel manufacturers in the future.