Category Archives: Policy

Age of Cheap Polyester Ending As Environmental Concerns Mount

AGE OF CHEAP POLYESTER ENDING AS ENVIRONMENTAL CONCERNS MOUNT

Cotton has been attacked by environmental groups for decades for the use of pesticides, fertilizer, and water. Meanwhile, the man-made fiber industry has experienced unchecked growth with hardly a word regarding the damage caused by fossil fuel extraction, fiber production and end-of-life disposal of man-made fiber products, especially in China.

As China started to industrialize in the early 1980s, textile production was a leading area of investment. In 1990, polyester fiber production in China was about 1 million tons, but by 2015, polyester production in China had grown to approximately 35 million tons, equal to 70% of the world total. The 35-fold increase in polyester production in China in 25 years is the single biggest factor reducing world demand for cotton today.

Since 1990, China’s man-made fiber sector has enjoyed record growth, with fixed asset
investment breaking all records as new capacity was added throughout the supply chain, from
the production of feedstocks to finished fiber products. This growth occurred with little consideration for air and water quality. The policy of economic growth and jobs first meant that
any attempt to enforce the few regulations which existed were systematically overlooked. During this period, China became the largest man-made fiber feedstock and fiber producer in the world and came to dominate the sector.

There has been wholesale destruction to China’s water, air and soil caused by the unparalleled pace of industrialization over the past twenty years. Recent reports indicate that 80% of the
underground water supply is unsafe to drink. Any visitor to Beijing in the winter can testify to the smog and the “Airocalypse”, the term used to describe the periods when the air is unhealthy and almost unbreathable.

Previous Chinese government appeared to view environmental issues as part of a western conspiracy to limit China’s growth. However, things have changed under the leadership
of Xi Jinping. President Xi took office in November of 2012 and has led a radical shift in Chinese environmental policy, with air and water quality exceeding economic growth in terms of importance to his government’s agenda. Other data, such as from social media and
spending habits, illustrate that the issue has become extremely important to the Chinese people.

One significant difference in the administration of Xi Jinping is that the Communist party has reasserted power from the top down. In the past, local governments often ignored directives from Beijing, and city, county and provincial leaders focused on economic growth, often at any cost to the environment or individual rights.

However, under Xi Jinping, Beijing’s directives now override local economic concerns, and a series of important new laws and enforcement initiatives were launched in late 2016 to tackle air and water pollution. These programs have real power, and the effort to rein in industrial pollution is influencing almost every major business that has an impact on air or water quality.

China’s production of MEG and PTA,the main raw materials for polyester fiber, entered a phase of uncontrolled growth after the global financial crisis of 2008. China responded to the financial crisis with the launch of a$586 billion stimulus plan that allowed for the flow of funds into investments in industrial sectors at subsidized interest rates and easy terms.

Chemical feedstock industries have large capital requirements, and the stimulus plan
provided the capital for these industries to rapidly expand. In just the last five years, PTA
capacity in China has grown by more than 200%, and in 2016 China accounted for 56% of global PTA production. In addition, from 2011 to 2017, China’s MEG production increased more than 500%. A large block of these MEG plants use coal as a feedstock.

Polyester staple fiber accounts for about 22% of China’s total polyester production, and filament accounts for 51%. Viscose fiber production has also accelerated in recent years, with China today accounting for 65% of global production.

There are no comprehensive statistics on the number of polyester fiber production plants in China, their ownership, sources of financing or operating costs. However, the growth in polyester production in China has been so rapid, so enormous and so incongruous with investment patterns in other countries in Asia, that it is impossible to believe that industry expansion is a result of competitive, private sector investment.

The cost of construction of a polyester plant with a capacity of 250,000 tons per year is estimated at about US$150 million. It has been widely reported that the national, provincial and local governments in China encourage industrial expansion through loans that are never repaid made by government-owned banks. There are numerous stories in China of “ghost cities” and industrial plants producing only for inventory because they have no customers. Given the emphasis by all levels of government in China on textile production since 1990, it is highly likely that much of the expansion of polyester production capacity occurred with the help of loans that have become grants. It would be naïve to think that the expansion in polyester production in China occurred because Chinese consumers were demanding more polyester or that other market forces encouraged such growth. The expansion resulted from the industrial policies of the Government of China.

Enormous Polluter

The man-made fiber sector has been an enormous polluter of both air and water. Until now, environmental controls were not enforced in China. However,the new initiatives have begun the process of bringing these industries into compliance, and pollution controls are having significant impacts on the man-made fiber sector and textile operations. Viscose fiber plants in a few areas have been forced to close due to smog emissions, and the polyester fiber supply chain has had major disruptions due to shut downs and closures. Coal based MEG plants have been forced to close because of air pollution.

Much of China’s man-made fiber production base is located only a few hundred miles from either Beijing or Shanghai, and these populations are demanding clean air and safe water. Average income based on measures of purchasing power parity for the Tianjin region is US$33,290, for Beijing $32,995, Shanghai $32,684 and for the entire province of Shandong it is $27,428. The importance of the spending power of this population is now more important economically than the benefit of the jobs provided by the older industrial plants. Consequently, the man-made fiber sector will be either forced to close or to install treatment facilities.

Polyester staple fiber (PSF) is made up of virgin polyester and recycled polyester. The recycled PSF plants do not have end-of-pipe wastewater treatment systems, and thus they release a host of potentially dangerous substances, including antimony, cobalt, manganese salts, sodium bromide and titanium dioxide. To install the necessary water treatment equipment would end the economic advantage of the recycling process. In the crackdown on pollution, the recycled polyester fiber plants are being shut down.

In addition to water pollution issues, the recycled PSF plants in many areas are fired by coal, and in East China this is a chief source of air pollutants. In Hebei, which is close to Beijing, a number of plants have been recently closed which removed as much as 500,000 tons of production capacity from the market. This, plus the other closures, has had a significant impact on prices.

The demonization of cotton is very misguided. The facts are quite clear: the process of converting crude oil, natural gas and coal into a wearable fiber is very damaging to the environment if expensive environmental safeguards are not in place. This fact is now coming to light in China. The enforcement of the environmental standards and cleanup will be costly, which could mark an important turning point for the cotton industry.

Since the 2008/09 global financial crisis, cotton has lost approximately ten percentage points of market share, driven by the production of cheap man-made fibers, especially polyester fiber. The production of cheaper apparel has caused environmental destruction in the regions in which artificial fibers have been produced.

The pace of expansion of feedstock and polyester fiber and filament production may have peaked. New capacity will be much more expensive to bring on line as plants will be required to meet stricter environmental standards. Energy consumption in East China is changing, and the days of cheap coal based plants are over. Any feedstock plants using coal or coal based energy will be closed or will have to invest inexpensive new equipment. PSF is a heavy consumer of water, and this is becoming a precious commodity.

In the near-term, China’s production capacity of PSF is adequate, so there is enough idle capacity to come on-line to fill demand. However, additional growth will be much costlier.

These new dynamics mean that a PSF floor price is developing in China, which indicates that cotton should expect an increase in consumption just from changes in fiber blends. This floor price will be near the 55 – 60 cents per pound level for now, and may even move higher.

Cotton still faces a battle with consumer preference, its ability to innovate and meet changing tastes. Cotton also faces the task of communicating to the consumer the environmental cost of man-made fiber production, while also improving its own track record. Nevertheless, the changing price dynamics of polyester staplefiber in China will be an important global macroeconomic development during the next decade.

China’s Clampdown on Pollution is changing the Textile Environment

CHINA’S CLAMPDOWN ON POLLUTION IS CHANGING THE TEXTILE ENVIRONMENT

China’s move to enforce environmental regulations has entered a new phase, and by one estimate, a third of all factories in China have experienced at least some temporary closures. The Chinese Purchasing Manager Index (PMI) for October declined to 51.6 from a 5-yearhigh of 52.4 in September. The large-company PMI remained above 50,but the medium- and small-company PMI’s contracted to 49.8 and49.0, respectively; any index value below 50 denotes contraction. The China National Bureau of Statistics (NBS) said that the PMI for high energy-consuming and polluting companies declined as a result of the government’s crackdown on pollution violators.

The regulatory clampdown is showing no signs of weakening. Factories that burn coal or use electricity generated by coal, factories that are heavy water users and factories that discharge pollutants into water or air, are being shut down or forced to make significant investments in expensive treatment technology. Some factories are being closed altogether because they simply cause too much environmental damage. Even if a factory complies, a subcontractor could be shut down, disrupting the supply chain.

As of 2017, the size of the disruption is only a ripple going through the textile supply chain, but this is only the beginning. Other than new factories in the western region of Xinjiang,most of the country’s massive petrochemical, man-made fiber, textile and apparel operations are in Eastern China, which has the dirtiest air and water in the country.Iconic textile regions, such as Shandong and Hebei, are at the heart of the pollution crackdown.

The primary raw materials for producing polyester and other man-made fibers are crude oil, coal and natural gas, and one key target of the pollution crackdown is the use of coal. Polyester is produced from Purified terephthalic acid (PTA) and monoethylene glycol (MEG). Both are sometimes made from coal, and production of each has been affected by the closure of coal based plants.

While new production capacity is reportedly set to come on line in the man-made fiber sectors of China,there are also indications that the environmental regulations are curtailing domestic production and leading to increased imports of fiber. The increase in Chinese polyester fiber production from 1 million tons in 1990 to 35 million tons by 2015 put significant pressure on South Korean and Taiwanese producers, formerly the largest exporters. Ironically, in recent months China has actually begun to import polyester staple fiber. Imports in September from South Korea were up100% from a year ago, and imports from Taiwan and Thailand were also noted. This is quite unusual.

Recyclers Affected

As crazy as the argument seems, there is a lot of hype in the apparel world regarding yarns made from recycled plastic water bottles, calling them Eco-Friendly. Recycling has become a big business in China, but the recycling process is energy intensive, and a large number of recycling plants have been closed in recent months. China has also announced that as of the end of2017, it will no longer allow the import of plastic bottle waste which is used as a raw material, leading to reduced prices for bottle waste in exporting markets. China is aggressively moving away from the products which have destroyed its environment. This will have huge consequences as it shakes the foundation of the global man-made fiber industry.

Viscose Production Curtailed

Much-hyped viscose fiber, which has taken market share from cotton due to its advantage in adding softness to products, is also being affected.Breaking down wood pulp into a fiber is environmentally damaging unless expensive equipment is installed, which has not happened in much of the Chinese industry. Water is an important resource for viscose manufacturing, and plants in China have typically been built adjacent to rivers and linked to their pollution.

Bamboo is also a popular raw material for viscose fiber in China and a couple of other locations in Asia. Bamboo has been promoted as a more environmentally friendly type of viscose because the bamboo is typically grown on marginal land. However, the process to breakdown bamboo is also harmful to the environment unless the process is strictly controlled. Worker safety is a major concern. Twenty-one companies in China now account for 65% of global viscose fiber production. One of the largest is in Jiangxi Province and has been sighted for releasing untreated waste water into China’s largest fresh water lake, Poyang, and for contaminating nearby rice fields.

Polyester Costs

The production cost of polyester fiber is increasing and will continue to move higher. Chinese fabric cost will move higher,as well. Unlike cut and sew operations, which can migrate to the cheapest locations, man-made fiber production and dyeing and finishing operations, which are linked to the discharge of untreated effluent, are capital intensive and cannot be moved easily. India, which would be one logical relocation target, already has a pollution crisis of its own. Vietnam, which has drawn some of the largest investments in textile production in recent years, has already taken a tough stance on dyeing and finishing after seeing what these industries have done to the Chinese environment. Therefore, THE AGE OF CHEAP POLYESTER IS OVER.

We expect the impact of the crackdown on pollution in China to actually be evident in the2018/19 season in the cotton industry and will have an effect on prices by stimulating demand. Increases in world cotton mill use may be stimulated if the CotlookA Index falls to less than 75 cents per pound.

End of Era in the WTO

The End of an Era: Cotton is no Longer Prominent in the WTO

Summary: The WTO completed its 11th Ministerial Conference on 13 December in Buenos Aires. The closing statements were remarkable for the omission of any reference to cotton. Cotton as an industry and African cotton producers have had their moment in the diplomatic sun, but that moment is passing. Trade negotiators are tired of talking about cotton. Donors are tired of funding cotton projects that don’t do any good. Multilateral institutions like The World Bank, the Food and Agriculture Organization of the United Nations (FAO) and the United Nations Commission on Trade and Development (UNCTAD) are losing interest in cotton, and in commodity industries generally, and they are shifting focus back to more generic issues such as women’s empowerment and food security.

The End of an Era: Cotton is no Longer Prominent in the WTO

The World Trade Organization (WTO) completed its 11th Ministerial Conference (MC11) since its founding in 1995 on 13 December 2017 in Buenos Aires, and the closing statements were remarkable for the omission of any reference to cotton. (https://www.wto.org)

MC11ended with modest progress on reducing fishing subsidies and pledges to avoid imposing customs duties on electronic transmissions for two years. There was no mention of cotton in the closing statements.

Cotton has been called a “litmus test” of the commitment of developed countries to the Development Round, and a “poster” for the Doha Development Agenda (the Doha Round), and in previous WTO ministerial meetings, cotton was a major issue. MC11 marks the end of an era in which cotton and issues related to cotton were central to international trade negotiations. Now, cotton is just one more commodity again.

The Doha Round of multilateral trade negotiations was launched in 2001 with most countries eschewing sectoral specific initiatives, and if you were to have picked a commodity to serve as the poster for development within the Round, it would probably not have been cotton. The gross value of world cotton production is smaller than for other major crops. For example, the gross value of world cotton production in 2001 when the Doha Round was launched was about $30 billion. In contrast, maize was $87 billion, soybeans $49 billion, sugar cane as well as beets were $52 billion, and wheat was $93 billion. (FAO, 2015). Additionally, cotton is primarily a fiber crop, not a food crop, which means it is not usually associated with food security, a traditional focus of government concern.

Nevertheless, cotton rose to prominence in the Doha Round, because the President of Burkina Faso attended a WTO meeting in 2003 (it is unusual for a head of state to attend such a meeting) and demanded that cotton be addressed specifically. Speaking on behalf of Benin, Burkina Faso, Chad and Mali, collectively known in the WTO as the C4, the President of Burkina Faso noted that cotton is the only good of any significant value exported by the C4, and he asserted that subsidies in developed countries depressed world prices thus hindering efforts at income generation and economic development in developing countries. He stated simply that the C4 could not support completion of the Round unless the cotton issue was resolved, an ominous threat in an institution that requires unanimity.

The prominence of cotton became official in 2005 at the next WTO meeting in Hong Kong, when member governments agreed to treat cotton “ambitiously, specifically, and expeditiously within the talks on agriculture” in the Doha Development Agenda, the only commodity singled out for specific treatment. From then until this year, at every WTO meeting in which agriculture was discussed, cotton was a prominent part of each conversation.

The 2011 Geneva WTO Ministerial Conference reaffirmed the commitment of members of the WTO to address cotton “ambitiously, expeditiously and specifically”, within the agriculture negotiations.

The Bali Ministerial Declaration issued in December 2013, included a specific “Decision” in which Ministers said again that they would address cotton “ambitiously, expeditiously and specifically”, within the agriculture negotiations.

At the Tenth WTO Ministerial Conference in Nairobi in December 2015, Ministers again issued a specific “Decision” on cotton, with countries pledging to grant duty-free and quota-free market access for exports by Least Developed Countries (LDCs) of cotton-related products and to eliminate export subsidies on cotton.

But, at the 11th Ministerial Conference just completed, cotton was just one of many issues and special interest concerns competing for the attention of government leaders. There were events and activities related to cotton conducted on the margins of MC11, but these were not central to discussions among ministers.
One cotton-specific achievement announced in Buenos Aires was the launch by the WTO and the International Trade Commission (ITC) of a “cotton portal.” The portal is supposed to provide a single online entry point for all the cotton-specific information available in WTO and ITC databases. The Cotton Portal includes information on market access, trade statistics, and country-specific contacts related to cotton market access to make it easier for cotton exporters, importers and investors to contact each other and complete trade deals.As interesting as the launch of the cotton portal is, and not to diminish the work of the ITC, the addition of a new source of data on cotton trade contacts is hardly a major diplomatic achievement. The fact that this was the only cotton-related activity announced at the WTO meeting in Buenos Aires shows that trade officials have grown weary of talking about cotton.

Why Cotton is No Longer a Focus of WTO Talks

The fact that cotton is no longer central to talks in the WTO is partly a reflection of the reduction in subsidies in developed countries. Subsidies for cotton paid to farmers in the EU were mostly decoupled from current production decisions in 2006 and remain smaller than they were previously, and subsidies for cotton in the United States have fallen from between $3 billion and $5 billion a decade ago to about $1 billion today. Thus, subsidies paid to farmers in the EU and United States are no longer major sources of distortion to world cotton production and trade.

In addition, the structure of the world cotton market has changed fundamentally since the Hong Kong Ministerial was held in 2005. China is now the largest consuming country and India the largest producing country and second largest exporter. The major sources of distortion in world cotton production and trade today occur in China (the State Reserve) and India (Minimum Support Prices), but subsidies paid to farmers in developing countries are not a focus of discussion in the WTO.

Another reason cotton is no longer central to the WTO agenda is that the reform of trade policies in the cotton sector, coupled with development assistance (foreign aid) is not helping African farmers anyway. The premise underlying the talks on cotton in the WTO was that subsidies paid to farmers in developed countries led to oversupply and reduced market prices, thus harming the interests of African farmers. However, the Cotlook A Index, which averaged about 55 cents per pound between 2001 and 2005 when the Sectoral Initiative on Cotton in the WTO was launched, is currently above 80 cents. In addition, about $900 million in donor aid has been spent since 2004 or is committed under current projects in support of the cotton sector of Sub-Saharan Africa. Despite the rise in market prices and the support given to the cotton sector, the average yield across Sub-Saharan Africa of 330 kilograms of lint per hectare today is the same as it was two decades ago, and total production of about 1.5 million tons is the same as it was when the Doha Round started. So, why bother to focus on cotton if it is not going to do any good?

Implications

Cotton as an industry, and the C4 as a group, have had their moment in the diplomatic sun. That moment is passing. Trade negotiators are tired of talking about cotton. Donors are tired of funding cotton projects that don’t do any good. Multilateral institutions like The World Bank, the Food and Agriculture Organization of the United Nations (FAO) and the United Nations Commission on Trade and Development (UNCTAD) are losing interest in cotton, and in commodity industries generally, and they are focusing on more generic issues such as women’s empowerment and food security.

Natural Fibre Demand Rising

A Rising Tide Lifts All Boats

Summary:
According to the Discover Natural Fibre Initiative, world production of all natural fibers rose by an estimated 8% to approximately 33 million tons during 2017, led by increases in abaca, coir, cotton, jute and wool. As will other natural fibers, world cotton mill use is rising and is estimated by ICAC at more than 25 million tons during 2017/18. The across-the-board increase in world natural fiber production and consumption indicates that the world economy is significantly stronger than prominent economists are estimating.

A Rising Tide Lifts All Boats

According to the Discover Natural Fibre Initiative (DNFI.org), world production of natural fibers rose by an estimated 8% to approximately 33 million tons during 2017, led by increases in abaca, coir, cotton, jute and wool. A strong world economy with increased purchases of apparel and home furnishings, 5% annual growth in paper production, increased use of natural fibers in composite materials and rising awareness of pollution linked to chemical fiber products are encouraging expanded use of natural fibers.

Cotton is participating in the increase in world natural fiber production and consumption. World cotton mill use is estimated by ICAC to be rising to more than 25 million tons during 2017/18. Despite cotton prices that remain 20 cents per pound above the long run average, despite polyester prices that remain lower than cotton, despite a drumbeat of efforts to demonize cotton by advocates of organic agriculture and retailers seeking brand differentiation. Despite all this, amazingly, cotton mill use is rising. Cotton use is still several percentage points less than the record of nearly 27 million tons achieved a decade ago, but it is climbing from the post-recession low of 22 million tons in 2011/12. Apparently, the world economy is much stronger than many economists believe, and apparently consumer preference for cotton is sufficiently resilient to withstand the exaggerations and falsehoods told by those who demonize.

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Cotton is not alone in experiencing growing demand. World demand for abaca, known as Manila hemp, is between 100,000 and 120,000 tons. However, growth to between 120,000 and 150,000 tons is forecast by 2022. World industrial hemp harvested area reached 120,000 hectares in 2016. Prices of hemp short fibers have been trending higher and reached 80 Euro cents per kilogram at the factory gate in Central Europe in 2016. World production of raw jute is increasing from 2.6 million tons in 2015/16 to 3.265 in 2016/17 and an estimated 3.4 million tons in 2017/18. World production of sisal was about 145,000 tons in 2016. The largest end uses of sisal are twine and pulp and paper production, and demand is rising with increased paper production around the world. World wool production has been negatively affected by droughts in Australia and South Africa during the past year. Nevertheless, demand for fine wools used in active and leisure wear is rising as consumers become more aware of the positive attributes of wool and the negative effects of microfiber pollution.

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What is behind the rise in production and use of natural fibers in the face of continuing 6% annual gains in polyester use? The most likely answer is strong economic growth, combined with beneficial consumer preferences for natural fibers.

World mill use has trended upward since World War II and reached 20 million tons by the mid-1980s. The breakup of the Soviet Union led to a decade of decline in the world total of cotton use, and mill use did not reach 20 million tons again until 2000/01. Use rose rapidly in the early 2000s with the end of the Multi-fiber Arrangement and strong economic growth, but then plummeted during the 2008-09 recession and because of the spike in cotton prices in 2011. Mill use has been climbing since 2011/12, not because of competitive prices or large available supplies or strong promotion efforts by retailers. Rather, mill use of cotton is rising because consumers are buying stuff, and even with a continuing loss of market as a share of total fiber use, mill use of cotton in absolute terms is rising. This suggests that economists are underestimating the strength of the world economy.

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World real (inflation adjusted) growth in Gross Domestic Product (GDP) averaged 3.5% per year between 1980 and 2016. International Monetary Fund estimates put real GDP growth in 2017 at 3.6%, barely above the long run average, and growth over the next five years is estimated at 3.7% to 3.8% per year. According to the IMF, growth is slowing in China but rising in other developing countries. Economic growth in the United States and other developed countries is rising this year but declining again over the next five years. Overall, the economic picture painted by IMF data indicates a world economy growing barely faster than average.

However, data on prices and quantitates in the world market for cotton and other natural fibers indicates that the picture drawn by the IMF is not capturing something. Economic growth must be stronger than indicated by the IMF for cotton use to be rising despite prices 20 cents per pound above the long run average.

Mill use is climbing in China, India, Vietnam and Bangladesh and remaining steady in the United States while falling slightly in Europe. Statistics on trade in textiles and clothing are lagged by many months, but retail sales of apparel and home furnishings must be climbing in developed countries. Reports of strong sales growth at retail in Europe and the United States during December suggest that pipeline stocks of apparel and textiles are probably low, and this means that mill use is likely to actually strengthen during 2018.

Overall, the picture is very encouraging for cotton and all natural fibers. Cotton prices remain distorted by the huge state reserve in China, and until that reserve is completely liquidated cotton prices will remain higher than average. That cotton consumption in absolute terms is rising despite high prices indicates that the world economy is growing by more than just an average rate, and it indicates that the underlying consumer preference for cotton remains very strong.