After a year of synthetic fiber prices remaining relatively stable in the midst of a volatile cotton market, gross margin erosion could become a more significant risk among companies using or producing goods such as nylon and polyester if crude oil prices continue to rise, according to analysts with Great American Group, Inc.
Great American Group’s latest Textiles and Apparel Monitor notes that after falling from the highs witnessed in 2011, cotton prices have remained flat since July 2012 while the cost of oil has risen 6 percent over the past two months. As synthetic fibers continue to chip away at the dominant market share held by cotton, recent price surges for feedstocks such as paraxylene have a greater impact than ever on the textile industry as a whole, according to Kristi Faherty, managing director for Great American Group’s Advisory & Valuation Services Division.
“A continued increase in crude oil prices could present a challenge for many within the industry,” Faherty said. “The competitive market has made it difficult to pass along price increases to customers, so margin erosion remains a major concern.” While margin compression remains a short-term concern, Great American Group analysts are optimistic for the domestic textiles industry. U.S. profits are on pace to far exceed those achieved in 2011, and with labor costs rising in China, the Far East’s dominance is being challenged in the textile marketplace.
“Improvements to consumer demand and production expenses will help buoy the industry through 2012,” Faherty said. “Textile mill output and textile product shipments are likely to remain ahead of 2011, and with cotton prices in check, the industry is far more stable than it was a year ago.”
