Manufacturers at mercy of cotton prices, labour costs

Clothing and footwear wholesaler Pacific Brands has reported a full-year loss of $132 million, highlighting the challenges facing the industry, including cotton prices and Chinese labour costs.

Pacific Brands, which produces iconic labels such as Bonds, Hard Yakka and King Gee, attributed the loss to non-cash impairment charges and restructuring costs.

In addition to shedding more than 2,600 jobs, the company has moved its manufacturing from Australia to China, and has reduced its portfolio of brands and labels from 350 to just 35.

Pacific Brands chief financial officer David Bortilussi says gross domestic margins will come under pressure this year after the company implemented double-digit price increases across bedding products.

Underwear and hosiery prices will also rise this quarter to combat cotton prices and Chinese labour costs, which have surged dramatically amidst rising factory wages.

However, the company has conceded the cotton price spike has already reversed, which means it could see an earnings recovery in the second half of next year.

Cotton prices plunged 38% last month – a welcome reprieve for clothing manufacturers who have spent the last year grappling with higher costs.

But now retailers are wondering whether lower cotton prices will last or whether the volatility will continue.

Brands that specialise in value-priced merchandise, such as T-shirts and jeans, are the most vulnerable to price volatility because raw material costs make up a greater percentage of the cost of a garment.

China, the world’s largest cotton consumer, reported a 32% year-on-year drop in its cotton imports in June, confirming market fears over weak demand.

Meanwhile, the Department of Agriculture cut its estimate of US cotton exports by 8% to 12 million bales for the marketing year ending July 31, 2012.

As manufacturers remain concerned about cotton prices and labour, a report by the Commonwealth Bank reveals more than half of SME exporters plan to increase their currency hedging activity in response to the high Australian dollar.

The Aussie Dollar Barometer tracks SME importer and exporters’ exposure to the dollar, their expectations for trading levels, and hedging plans for managing foreign exchange risk.

According to CBA currency strategist Joseph Capurso, Australian exporters are continuing to restructure their business operations and plan more proactively in order to stay competitive.

“The reality is that the pressure brought about by the high Australian dollar means that these firms are being required to make changes to their business to lift productivity,” he says

“Based on exporters’ predictions for the dollar of US$1.17 by the end of 2011, they will continue to feel this impact for some time.”