Sports brands have already started to charge slightly higher prices on selected products, privileging limited editions and premium or novel product releases. The price increases have been a logical response to a situation where the available demand is outstripping the demand, especially because of high Covid vaccination rates, coupled with improved economic conditions and prospects at the micro-economic and macro-economic levels.
The inflation rate rose to 4.7 percent in the U.S. last year, accelerating to 7 percent in December, including a 5.8 percent gain for apparel. With inflation up to a 40-year high in the U.S., the Federal Reserve indicated on Jan. 24 that it might raise interest rates in March for the first time since December 2018. While the monetary authorities of England and Norway lifted interet rates in December, the European Central Bank has decided to keep interest rates unchanged until further notice, assuming that energy prices and the gap between the supply and the demand will narrow later this year. It has predicted an inflation rate of 4.2 percent for the eurozone in 2022.
In the European Union, the inflation rate is estimated to have reached 5.0 percent in December and 4.7 percent for the year, but in Germany, it declined slightly to 4.9 percent in January from 5.3 percent in December, indicating a possible stabilization. Like in the U.S., the increase was driven by higher energy prices.
An important inflationary factory has been the recovery of the general economy in 2021, which translated into an increase in the GDP of 5.2 percent in the eurozone, after a drop of 6.9 percent in 2020. The increase amounted to 5.7 percent in the U.S. and to 8.1 percent in China, where it slowed down in the fourth quarter. Higher consumer spending was a component of the increase. In the U.S., total footwear consumption jumped by 20.5 percent in December and by 29.8 percent for the full year.
Here is an analysis of the inflationary factors at play in different areas of the supply chain:
Freight: After the unprecedented supply chain crisis of 2021, the New Year opened with key shipping rates continuing to increase. While trans-Pacific lanes had begun a steady rate decline in mid-September, the Jan. 6 week marked the fifth consecutive reversal of that trend. Year-over-year, the Shanghai to Los Angeles price of $10,520 per 40-foot container was 151 percent, while Shanghai to New York was up by 112 percent. According to Freightos, container freight rates from Asia for the week of Jan. 17 were up by nearly 250 percent to the U.S. West Coast, by 184 percent to the U.S. East Coast and by 83 percent to Northern Europe, where more and more companies are considering railway transportation as a cost- and time-effective alternative.
Manufacturing & Deliveries: Hopes that Chinese manufacturing shutdowns for the Lunar New Year will give ports a chance to catch up on backlogs have been complicated by efforts to combat the Omicron variant ahead of the Beijing Winter Olympics. The New York Times reported that at least 20 million people, or 1.5 percent of the Chinese population, were under lockdown as of Jan. 16, though the orders are minimally affecting port cities thus far. Potential factory lockdowns may undo any “return to normalcy” that the Lunar New Year catch-up could provide. According to Flexport, a logistics firm cited by the Times, delivery times from Chinese factories to West Coast ports stood at a record 113 days in early January, up from fewer than 50 days in January 2019. Many companies have resorted to expensive air freight to get products to the market in time, particularly during the critical Holiday season, and because of the factory lockdowns in Vietnam last summer, footwear has been more affected than clothing.
Wages: Wages are rising for 2022 in the majority of the Asian garment exporting countries. China entered the year with 20 of its 31 provincial-level regions having boosted their minimum wages over 2021 levels. The move came on President Xi’s call for “common prosperity,” with half the provinces boosting wages following an August meeting of the Communist Party’s Central Committee for Financial and Economic Affairs where planners called for broader income distribution, Nikkei Asia reported.
The Guangdong Province upped its monthly minimum wages in December – its first raise in three years – by 7 percent for low-range wages starting at RMB 1,620 ($254), with upper-range salaries growing by 15 percent to a minimum of RMB 2,360 ($370). Jiangsu, Zhejiang and Hubei provinces all implemented double-digit hikes, while Liaoning, Heilongjiang, Inner Mongolia and Shaanxi also raised wages.
Vietnam last raised its minimum monthly wages by about 6 percent in 2020, and they remain at VND 3,070,000 ($136) to VND 4,420,000 ($195), depending on the region. Cambodia added $2, effective last month, to its minimum monthly wage for textile and footwear industry workers. This brought monthly wages to $194, falling short of the unions’ goal of $204, but coming in above the $188 offered by the industry. In Myanmar, the National Committee on Minimum Wage decided at the start of the year to maintain the status quo of Ks4,800 ($2.67) pre day, or Ks600 (US$0.33) per hour for an eight-hour day, first implemented in 2018. As of yet unfounded rumors have circulated that the country’s military junta, which assumed control in February 2021, would drop the level to its previous Ks3,600 ($2) per day amid the economic crisis that followed the coup.
Forecasts for raw materials prices, which account for up to half the manufacturing cost for both apparel and footwear, show prices on the rise for 2022, too. The details:
Petrochemicals: The recent energy crisis in China has been a warning signal at a more international level. Rising petrochemical prices have already affected the cost of synthetic fibers, which are being more widely used in shoes and clothing. This has led more and more producers to consider recycling for cost and sustainability reasons, but McKinsey & Co. has warned that this is leading to higher prices anyhow as recycling capacities will be limited in the short term. Goldman Sachs analysts expect a boom in prices for petrochemicals in 2022 and 2023 as pre-Omicron variant demand levels pick up where they left off from recovering international air travel in Asia and Oceania. While the bank’s most recent price forecast for Brent crude for 2022 and 2023 is $85 per barrel, it told CNBC that $110 per barrel is not out of the question if the supply is unable to meet the demand as economies recover. The U.S. Energy Information Administration held a more conservative outlook, based on projected increases for WTI Crude of 5 percent to $71.3 and 6 percent for Brent to $74.95. On the other hand, global liquid fuel inventories are expected to begin recovering in 2022, increasing by 0.5 million barrels per day after 2021’s drop of 1.4 million barrels per day.
Steel: The World Steel Association sees the global demand growing at an annual rate of 2.2 percent to annualized level of 1,896.4 metric tons. The growth is coming after an estimated increase of 4.5 percent in 2021 after a slowdown to 0.1 percent in the prior year. However, the demand is likely to pick up again later this year due to a high backlog of orders combined with a rebuilding of inventories and further progress in vaccinations in developing countries. The growth in developed countries is expected to hit 4.3 percent for 2022, recovering to pre-pandemic levels. China will be the lone exception in major economies, with no growth projected in 2022 following government caps on production and a depressed real estate sector.
Cotton: Cotton closed 2021 with benchmark prices decreasing as March futures contracts dropped from 120 cents to 106 cents per pound in New York in the final month of the year, while the A Index fell from 125 to 119 cents a pound. The went down further in January. The Chinese Cotton Index saw more stability, staying between 159 and 162 U.S. cents. Cotton Inc. noted that these changes coincided with the Omicron outbreak and the Federal Reserve considering reining in monetary expansion. While the December NY futures contract suggested a further marked price drop between now and the next northern hemisphere harvest, Cotton Inc. opined that the “upward trend is very much intact,” after weathering challenges since April 2020. Restrictions on cotton imports from China could be offset by increased yields and higher harvested areas in the U.S., Brazil and India. World cotton imports are forecast at 46.9 million bales, 4 percent below the last season’s record levels but still ranking as the third-highest ever. China is again topping import demand, making up 22 percent of the world total, followed by Bangladesh and Vietnam.
Wool: The latest weekly figures from the Australian Bureau of Agricultural and Resource Economics and Sciences put Eastern Market Indicator prices at A$14.35 per kilogram, up 21 percent from the prior year, while Western Market Indicator prices sit at A$14.08 per kilogram, up 43 percent. The Australian Wool Production Forecasting Committee projects shorn wool production for 2021/22 at 318 Mkg greasy, up 8 percent year-over-year after the strong rainfall in November built on favorable spring conditions. The favorable weather boosted feed supply, upping average cut per head by 3 percent to 4.54 kg greasy and allowing for a flock rebuild. The number of sheep shorn is expected to grow by 5 percent to 70 million heads this season.
Leather: Despite the vegan trend, the latest figures from Acumen Research and Consulting still show the global leather market growing at an annual rate of about 6 percent from 2021 to 2028, hitting $626.1 billion by 2028. The North American market is expected to see a fashion resurgence for leather products, including shoes and bags. The production will benefit from rising cattle waste in the U.S., coupled with an emphasis on waste management. Looking at 2016 figures, the industry was able to utilize more than 30 million cattle hides out of the 31.1 million generated by the meat industry. Demand from Asia is also seen contributing to the growth. China currently accounts for 36 percent of global production of leather products, while the Indian government has pledged to invest US$250 billion to support the industry through its Footwear, Leather and Accessories Development Programme.
