Cotton Price and Market

Fabric Mill’s PerspectiveNovember 2010

by Dr Gordon YenExecutive DirectorFountain Set (Holdings) Ltd.

Price Trend 2010

Source: TFC Commodity Charts

Inventory Exposure of Supply Chain

GarmentFOB = $1M

/mth

Inventory Turnover Days 6 months 4 months 2 months

Cost % of Raw Material over sales

70% 60% 55%

Inventory Value (US$) $1,386k $1,320k $1,100k

$ 330k x 70% (Cost % of Raw Material over

sales) x 6 months

$ 550k x 60% (Cost % of Raw Material over

sales) x 4 months

$ 1M x 55% (Cost % of Raw Material over sales) x 2 months

Cotton$231k/mth

Yarns$330k/mth

Fabrics$550k/mth

Impact of Price Increase on Material Cost

FabricFabric55%55%

YarnsYarns60%60%

CottonCotton70%70%

+ 35.4%

+ 115%

+ 8.1%

+ 28.1%

Assuming no inflation in processing cost

  NYBOT Cotton NYBOT Cotton Raw Material Input Value(US$'000)

Garment FOB

(Avg. US$/lb)(Avg. US$/lb) Price Factor Cotton Yarn Fabric  

Nov 2008 0.48 1 231 330 550 1,000

Nov 2009 0.65 1.35 313 412 632 1,082

Nov 2010 1.3 2.71 626 725 945 1,395

Who Made Money??

…didn’t fabric mills and spinners make BIG margins?

Some say…

Theoretical Price Increase of Fabric

FabricFabric55%55%

YarnsYarns60%60%

CottonCotton70%70%

  NYBOT Cotton NYBOT Cotton Raw Material Input Value(US$'000)

Garment FOB

(Avg. US$/lb)(Avg. US$/lb) Price Factor Cotton Yarn Fabric  

Nov 2008 0.48 1 231 330 550 1,000

Nov 2009 0.65 1.35 313 412 632 1,082

Nov 2010 1.3 2.71 626 725 945 1,395

+ 14.7%

+ 49.8%

US$2.5/lb

US$4.3/lb

71.8%

Assuming no inflation in processing cost

…people who had a big pile of EXTRA cotton…

So Who Made Money??

  Supply Chain Inventory Value for US$1M in FOB Garment Based on 2008 Price (US$’000)

Nov 2008 1,386 1,320 1,100

Nov 2009 1,877 1,647 1,264

Nov 2010 3,754 2,898 1,889

Impact of Price Increase on Inventory

2 months4 months6 months

Depending on season

FabricFabric55%55%

YarnsYarns60%60%

CottonCotton70%70%

Other Factors Increasing Costs and Working Capital

• Shortening of payment period: From Open Account to CBD, Down Payments

• Other costs inflations: wages, chemicals, energy, etc

• Tightening of Credit Terms Throughout Supply Chain: Full or Partial CBD, Down Payments

Price Trend 2010

Source: TFC Commodity Charts

Will History Repeat Itself?

Source: TFC Commodity Charts