An Industry Goes Viral

When the novel coronavirus, now called COVID-19, was first detected in Wuhan, the sprawling capital of Central China’s Hubei province, in December 2019, few could have imagined the impact it would have on the global economy. Roughly two months later, the talk is of a fresh global slowdown as a result of the outbreak that has already resulted in a deceleration of global trade.

Though these are early days yet, there are enough indications pointing to an adverse effect on the global textiles-apparel-fashion industry. Innumerable trade events and fashion shows have either been postponed or spiked; supply chains of brands are running into bottlenecks; manufacturers (from yarn to apparel) in many countries are looking at alternative raw material sourcing.

In short, a China-driven textiles-apparel-fashion industry faces a possible crisis situation. How grave this would be and how fast this can be overcome depends considerably on how effectively China controls the outbreak. At the last count (February 20), the World Health Organization (WHO) had reported 74,279 cases and 2,006 deaths from China alone. The chances of a global outbreak are still high, even as China has been grappling with bringing the spread to a halt.

Impact on Economy and Trade

China is the world's second-largest economy, and the biggest trading and manufacturing nation. It is only natural that anything that affect's China's economy will have a direct reflection on the global economy. Supply chains across industries have already been disrupted with the shutdowns of factories after China enforced lockdowns in one city after another as the disease spread.

Predictions, however, are guarded. Economists polled by Reuters between February 7-13 said the coronavirus-hit Chinese economy “will grow at its slowest rate since the financial crisis in the current quarter”. The 40 economists based in mainland China, Hong Kong, Singapore, as well as Europe and the United States, predicted that China’s annual economic growth in the first quarter of 2020 would slump to 4.5 per cent from 6.0 per cent in the previous quarter. The economists, nevertheless, were optimistic that the economy would bounce back in the second quarter.

It will take time for the COVID-19 impact to show up in trade statistics. According to the WTO Goods Trade Barometer of February 17, world merchandise trade growth is likely to remain weak in early 2020. The real-time measure of trade trends was marked at 95.5—less than the 96.6 recorded last November and well below the index’s baseline value of 100. The WTO remarked, "It does not account for recent developments such as the outbreak of COVID-19, the new coronavirus disease, which may dampen trade prospects further."

Meanwhile, the Oil Market Report (OMR) of the International Energy Agency (IEA) sees the first drop in global oil demand over a decade. The February report said, "Global oil demand has been hit hard by the novel coronavirus and the widespread shutdown of China’s economy. Demand is now expected to fall by 435 kb/d y-o-y in 1Q20, the first quarterly contraction in more than 10 years. We have cut our 2020 growth forecast by 365 kb/d to 825 kb/d, the lowest since 2011."

It said, "There is a major slowdown in oil consumption and the wider economy in China. While the SARS epidemic of 2003 is widely used as a reference point for analysis of COVID-19, China has changed enormously since then. Today, it is central to global supply chains and there has been an enormous increase in travel to and from the country—heightening the risk of the virus spreading. In 2003, China’s oil demand was 5.7 mb/d and by 2019 it had more than doubled to 13.7 mb/d (14 per cent of the global total). Last year China accounted for more than three-quarters of global oil demand growth." It concluded, "The effect of the COVID-19 crisis on the wider economy means that it will be difficult for consumers to feel the benefit of lower oil prices." The OMR is one of the world's most authoritative and timely sources of data, forecasts and analysis on the global oil market.

The International Civil Aviation Organization (ICAO) on February 13 said there had been an 80 per cent reduction of foreign airline capacity for travellers directly to/from China, and a 40 per cent capacity reduction by Chinese airlines as a result of international flights to/from mainland China. It noted that “COVID-19 impacts are expected to be greater than those caused by the 2003 SARS epidemic, in light of the higher volume and greater global extent of flight cancellations being seen. Seasonal passenger load factors are another extenuating factor, as is the fact that China’s international air traffic has doubled, and its domestic traffic increased five-fold, since 2003.”

The economic fallout has been most pronounced so far in Asia. South Korea has called for urgent measures, and Singapore has cut down its growth outlook this year, as have Thailand and Malaysia. Japan, which is seeing a shrinking economy, too has been hit with major automakers Toyota and Nissan reporting disruption at its factories both in China and at home.

Even though COVID-19 has not been declared a pandemic by the WHO, the possibility exists. A 2013 World Bank study had said, "A severe pandemic would resemble a global war in its sudden, profound, and widespread impact." So, a severe pandemic could cause economic losses equal to nearly 5 per cent of the global GDP, or more than $3 trillion. The WHO defines pandemic as the worldwide spread of a new disease, while the Centers for Disease Control and Prevention (CDC) says it is a disease that spreads across regions. The last pandemic was the 2009 H1N1 outbreak.

Impact on Fashion

Disruptions in the textiles-apparel-fashion industry have occurred at different levels.

Among the first to react were organisers of trade events and fashion shows. In early February, the organisers of the Shanghai Fashion Week, scheduled to be held from March 26 to April 2, announced that the event would be postponed. "We will actively search for (new) times and ways, and maintain close communication with partners who care for and support Shanghai Fashion Week," a statement said. The China Fashion Week, scheduled to start on March 25, is yet to make an announcement.

Trade fairs in Mainland China to be postponed include CHIC Shanghai, Intertextile Shanghai Apparel Fabrics – Spring, Yarn Expo – Spring. Trade fairs in other countries have been deferred / rescheduled as well. These include Asia Apparel Expo 2020 (in Germany), Apparel Sourcing Week (in India), DTG 2020 (in Bangladesh), Denimsandjeans (in Japan), Morocco International Textiles and Accessories Fair (in Morocco) and IGATEX (in Pakistan). The reasons are the same: COVID-19.

The London Fashion Week organised by the British Fashion Council, has already felt the pinch. The Chinese attendance was "significantly reduced" even as British-Vietnamese designer A Sai Ta cancelled his show because of manufacturing delays for his collection, which is produced in Shanghai. The Camera Nazionale della Moda Italiana (CNMI), Italy's fashion chamber, said 1,000 journalists, buyers and industry professionals from China would miss this season. CNMI believes luxury sales of Italian brands in China could drop by 1.8 per cent in the next six months.

The retail slowdown in China is already happening. About half of Nike-owned stores have temporarily closed. The brand is operating with reduced hours and experiencing lower than planned retail traffic in stores that do remain open. "In the short term, Nike expects the situation to have a material impact on our operations in Greater China. However, Nike’s brand and business momentum with the Chinese consumer remains strong, as reflected in the continued strength of Nike’s digital commerce business," said John Donahoe, president and CEO of Nike, Inc. Sportswear brand Adidas too has closed a number of its stores in China.

Luxury brand Burberry has closed 24 of its 64 stores. Group CEO Marco Gobbetti said, "The outbreak of the coronavirus in China is having a material negative effect on luxury demand. While we cannot currently predict how long this situation will last, we remain confident in our strategy. In the meantime, we are taking mitigating actions and every precaution to help ensure the safety and well-being of our employees. We are extremely grateful for the incredible effort of our teams and our immediate thoughts are with the people directly impacted by this global health emergency."

Around 60 per cent of VF Corp-owned and partner stores in China have been temporarily closed, while outlets that are currently open have experienced significant declines in retail traffic. "While the coronavirus will impact our financial results in the Asia Pacific region in the near term, VF’s growth opportunity in China and across the Asia Pacific region is significant and the fundamentals of our business are strong. VF is well positioned to navigate the impact of the coronavirus situation given the diversity of our business and operating model in other key geographies," a company spokesperson tweeted the quote attributed to Steve Rendle, VF’s chairman, president and CEO.

British product quality testing firm Intertek Group Plc said it temporarily shut its Hong Kong Garment Centre in Kowloon from February 11 for two weeks after an employee contracted the new coronavirus. “We have taken immediate action to minimise the impact on our customers’ business operations and communicated to them new temporary work arrangements,” a statement said.

Impact on Textiles

The Chinese economy and the country's polyester and textile industries could be under pressure as a result of the new coronavirus outbreak, commodities consultancy Wood Mackenzie said.

Principal Consultant Salmon Lee said in a note: “Concerns among market players in the polyester chain are widespread. Central China, where Hubei is at the core, is in a virtual standstill. All transport links have been cut amid the lockdown. Passing through the Yangtze river—stretching from one end of China to the other—has become impossible. Land transport is limited. If the virus spreads further, more cities and/or provinces in China could see a similar lockdown. That would be a logistical catastrophe and disruption to the polyester and textile industries would be disastrous.

"Hubei, and much of central China, is an important manufacturing base for the textile industry—with many textile, print and dyeing businesses clustered there. A prolonged transport paralysis will mean no fibres or fabrics produced in the major production bases in coastal provinces of China will be sent inland - whether by road, rail or along the Yangtze. Similarly, the delivery of apparels and other finished textile products to other parts of China, as well as exports, could also stall.

"Many workers of polyester producers, spinners, weavers and garment manufacturers had returned to their hometowns earlier in January—ahead of the Lunar New Year holidays. These workers may not be able to return to work amid the badly disrupted transport network. What’s more, the originally week-long holiday was extended to February 2 nationwide. Shanghai and at least 23 other municipalities and/or provinces have mandated no resumption of work before February 9.”

Most Chinese firms scale down operations or simply close shop for a prolonged period around the Lunar New Year holidays, which began on January 24 this year. This time, the Chinese government extended the holidays following the outbreak.

Ripples are also being felt in the cotton sector. The National Cotton Council in the US has said that the potential impacts of COVID-19 represent a significant wildcard in the outlook for the world cotton market in the 2020 crop year. “While the Phase 1 trade agreement (between the US and China) provided some cautious optimism for an improvement in the cotton economic situation, the China coronavirus outbreak in the early weeks of 2020 could delay China’s ability to increase purchases in the near-term,” the Council said on February 15.

In India, reactions came in January itself when major cotton exporter Kotak Commodity Services said it would stop selling new cargoes to China on concern that the spread of COVID-19 may force the top buyer of the fibre to close ports and banks. “Let’s not panic today, but if the virus keeps spreading and is not controlled in the next 10 to 15 days, then it will create a big problem for the cotton industry globally,” an official said. “If banks and ports are shut, then it will be a force majeure.” While China is a leading cotton producer, it also imports a substantial quantity from India. China’s stockpile of cotton has also been declining since its trade war with the US broke out.

Fibre2Fashion News Desk (WE-SG)