OVERVIEW

More than 18 months after the start of the global recession triggered by the Covid pandemic, the economic recovery continues but remains uneven: export-oriented countries are benefitting from this rebound, while service-dependent economies lag behind. Despite the positive outlook, there are increasing signs that the global recovery is losing momentum. The effects of the pandemic in critical points/links of the supply chain have resulted in supply disruptions, which in turn are feeding price pressures and affecting manufacturer’s production and sales. Supply concerns, labour shortages and inflation, together with the lingering threat of Covid-19, add to the list of risks and uncertainties. The third-quarter Barometer released by the French company Coface – one of the benchmarks in credit insurance and related specialised services – presents an overall positive picture, but with many stumbling blocks on the road to recovery. The global manufacturing sector has recovered fast since mid-2020, driven by increased spending on consumer goods. Because of robust household demand, strong trade flows continue to be a key support for economic growth, especially in the Asian-Pacific area. The demand for electronics and commodities is benefitting several markets in the region, such as South Korea and Taiwan. The economy of several key commodity exporters (Russia, Ukraine, South Africa, Chile and Algeria) are also supported by the higher prices. In Central and Eastern Europe, the competitiveness of exports and wide integration in European supply chains support the growth of exports. In terms of sectorial trends, the easing and lifting of restrictions in countries with the highest vaccination rates is contributing to a shift of household spending towards services such as brick-and-mortar retail, accommodation and recreation. At the same time, pandemic disruptions created breaks in the supply chain hampering business activity. The competition for commodities and input goods is strong and hinders industrial production at a global level, in some cases having an impact on sales.

RISING PRICES AND INFLATION

Commodity prices, input costs and freight rates have surged since the summer of 2020. “Many commodities broke record levels,” reports the Barometer of Q3 2021. “This has been notably the case with energy, particularly as European and Asian gas prices soured, as well as metal, wood and food prices. Widespread price increases for commodities and inputs have also led to increasing consumer prices. The harmonised inflation rate in the Eurozone reached 3.4% in September 2021, the highest level in 13 years. This echoes a rise in inflation recorded in most parts of the world, most notably in the United States, where the inflation rate has reached record levels of 5.4% in the last four months to September. A peak in inflation is expected soon in advanced economies. The inflation problem could be complicated by reports of labour shortages, as businesses offer higher compensations to fill job vacancies. An increase in labour costs could mean more persistent inflationary pressures.” Nevertheless, in Europe, “the ECB,” concludes the Barometer, “is closely monitoring the inflation dynamic with concern, but does not seem to want to adapt its monetary policy.”
In advanced economies, the fiscal side of the equation will remain supportive. While the Chinese economy is experiencing some turbulence and is forecasted to grow by 7.5% this year with a notably slower GDP growth in the second half, many governments in Western Europe will continue to support their economy further until the end of the year, when the 750 billion EU recovery fund will slowly be paid out.

RAW MATERIALS FOR THE TEXTILE-CLOTHING SUPPLY CHAIN

After the price rises recorded in previous months, in September Sistema Moda Italia’s synthetic index showed a worrying +36.2% in euros (+36% in dollars) compared to the same month in 2020. The race to the top seems unstoppable and in 2021 it became frantic after the summer. Cotton is at +47.3% and compared to August the average monthly increase was +6.3%. According to the International Cotton Advisory Committee, world cotton production is expected to grow by 6% in the 2021/2022 season and prices are expected to fluctuate between 82 cents and 127 cents per pound, with a midpoint at 101.6 cents per pound; the price will therefore remain at high levels, which have not been seen since February 2012. Some types of cotton imported into Italy and listed in the Milan Chamber of Commerce have seen even more significant price increases: compared to September 2020, an American type increased by +104.7% in euros, a Greek type increased by +53.9% and one from Central Asia by +46.6%. The Awex Eastern index for wool closed September at +45.1% in euros compared to a year earlier, with synthetic fibres (polyester, nylon, acrylic) up by +50.9%, artificial fibres (viscose) up by +17.3%. Raw silk on the Como market experienced an increase of just over +30.0% on a trend basis. Sistema Moda Italia underlines that the consequences for the supply chain are of great risk, especially for small companies, which have already been put to the test over the last two years. In addition to these price rises, there is also the jump in energy costs, which now stand at around 40% for electricity and 30% for gas, and which are reflected in the increased costs of CO2, combining problems resulting from the pandemic with international speculation. “The consequences for the Textile&Clothing supply chain,” reads a note, “are strong risks of resistance, in a network made up mostly of small companies, already severely tested in the last two years.” The demand is excessive for the period, following the restart of economic activities and the demand of international markets for Italian products. Unfortunately, basic supplies come from countries that have not yet returned to 100% activity after the Covid-related stoppages. This, above all, is the reason for such penalising prices in the key elements of the sector, i.e. energy, fibres, chemicals, as well as services related to freight logistics. “Price rises of this level, which in some cases are three to four times higher than pre-pandemic values, can only be reflected in an immediate increase in the value of products and processing, particularly for the companies upstream in the chain,” commented SMI President Sergio Tamborini, “many of which are small and already have compromised budgets.” According to Tamborini, “the impossibility, or even just the difficulty of proceeding with these increases, even while respecting the logic of the free market, could jeopardise the stability of the supply chain itself.”
In a speech at the recent Milan Fashion Global Summit, Remo Ruffini, President and CEO of Moncler, pointed out that commodity prices are so high because “the product is recovering faster than the production of raw materials”, but declares himself optimistic that prices cannot remain so high. In his opinion, 2022 will still be complex “with China closed for another year. The situation in Italy will slowly smooth out thanks to the current political stability with a firm-handed institutional leadership and policies to support businesses.”