While new trade barriers and the conflict in the Middle East have pushed up shipping costs, disrupted petrochemical supply chains and fueled volatility across global markets, neither has translated into a meaningful resurgence for domestic fiber producers. Instead, uncertainty has become its own cost, making planning more difficult for manufacturers and encouraging companies to build inventories rather than invest in new production.
In the second installment of HGI’s conversation with Wood Mackenzie analysts Bruna Angel, principal analyst, fibers, and Maria de Castro Lima, senior research analyst – Americas, paraxylene & derivatives markets, the discussion turns to what comes next. They examine why tariffs alone are unlikely to restore U.S. fiber manufacturing, who is ultimately paying higher costs across the supply chain, what the expiration of Section 122 tariffs could mean for sourcing decisions, and why inventory, compliance and geopolitical risk may continue to weigh on the industry well into the second half of the year.
HGI: If you can separate the impact of U.S. tariffs from the war, what would you say the impact to the fiber market has been?
MCL: It’s hard to quantify and separate the amount of impact that tariffs have had. Last year it was very inconsistent, very volatile. There was a lot of frontloading, especially at these points right before tariffs got implemented. The price increases in Asia, increased shipping costs and the related disruption would seem like a good opportunity for U.S. fibers, but it was just a matter of people bringing in materials beforehand and storing it, so it didn’t really improve the demand for the U.S. fiber producers, maybe slightly in certain markets, but it did not really help on the textile side. They still had a very bad year. They’re having a bad year now as well. This uncertainty did a lot of damage as well to downstream demand and planning.
HGI: Tariffs were initially sold to the public as a way of returning manufacturing to the U.S. but from what you’ve said, that hasn’t been the case for the domestic fiber market. What do you think the government could do to bolster production and demand at home?
MCL: The first thing that comes to mind is what’s happening with the Barry Amendment. They’re trying to reduce the loophole of bringing in material that’s not American made for the military. That makes [raw materials] more expensive for the military so there’s a lot of backlash about that, but that kind of mandated American-made rule does help. It serves as a stable demand base for these producers.
I don’t know what tariffs would have to increase by to stimulate significant production in the U.S. I’m afraid there’s a lot of loopholes that people can use. There’s a lot of transshipment. We know it happens.
BA: The U.S. market, both business and the consumer markets, have gotten used to very cheap prices and a huge diversity of offerings, and that can only come if you have a huge fiber base, which China has, and which India is developing. Even the specialties that Japan, Taiwan and Korea are able to offer are no longer that in demand. China may not be able to offer the same quality all the time, but it’s almost the same quality at such a low price that the price-quality proposition goes in favor of China. For instance, previously, Europe wouldn’t touch Chinese low-melt fiber but today, you probably find that 80% of the low-melt fiber imported into Europe comes from China. It’s not South Korean quality. It’s not Taiwanese quality, but it’s near enough, and the price is about 40% cheaper.
If the consumer is willing to pay the higher price for the same quality — we’re probably talking 40 to 50% higher by time you get to retail, if not double the price — then you can get made-in-America materials. This is why you can implement legislation like the Barry Amendment, and that does help certain very small volume producers, but the buyers downstream are going to say they cannot find enough of that production locally because the demand has [historically] been low. There’s a lot of excess capacity in the U.S., but it’s not the specialties that you need. So you can put tariffs up today, but you have to raise them a lot and wait two to three years for an increase in fiber production in the U.S., and you have the short supply loopholes. By defending the domestic market [with tariffs], you’re going to hit your consumer — and not just the end consumer but the spinner or weaver or knitter — because companies can import much cheaper fabrics.
HGI: Again, just looking at the tariff impact, what does the July 24th end of Section 122 tariffs mean for the industry?
BA: Uncertainty again. One of the reasons that the shippers have given for the very large rate increases over the last four weeks is a huge amount of frontloading. Not just fibers. It’s fibers, textiles, toys, you name it, into the U.S. ahead of the end of the 10% section 122 tariffs, because nobody knows what is going to happen after that. We don’t know what the section 301 implications are going to be.
HGI: Who’s absorbing these increased costs? The entire supply chain has been insulating end consumers but will that continue?
BA: What we heard from one of our analysts in India was that many in the Indian textile supply chain — this is from fibers down through spinning, weaving, knitting and cut, make and trim — were absorbing a lot of the tariff costs.
There is an underlying increase in cost from the tariffs that somebody will pay, and it’s only now that it’s starting to show up a little bit at the final consumer price in the U.S., but I think a lot of the Asian countries did absorb quite a lot of tariffs.
MCL: It seems that a lot of retailers, as well, in the U.S. absorbed some of the cost because prices didn’t go up as much as you would expect at all last year.
BA: The thing is that when the tariffs come, the retailer already probably has three to six months’ worth of inventory already contracted at certain prices, and [they] lift the prices very slowly. I think that’s what we’re seeing now.
HGI: As we look at the second half of the year, what’s your outlook?
BA: While there’s an alternative scenario, Wood Mackenzie believes we’re going to see synthetic prices declining only very slowly from current levels, because the ships are not where they should be. There is a whole load of reserves that countries are going to want to fill in, so you’re going to see them putting some oil into the petrochemical chain and some oil into their reserves, just in case the Middle East flares up again. This will take time, and you have countries like Bangladesh, Pakistan, even India and Vietnam, Singapore and South Korea that are going to have to reconfigure their petrochemical chains to actually absorb the volumes that they should have been absorbing these last few months.
Goodness knows when China is going to have a free flow of raw materials, because although they have been sufficient, there has been some strategy to make sure that industries were actually selling at the right price. China no longer allowed overproduction and losses that the Chinese state would have to then absorb, specifically during this period. They definitely put their foot down when the Strait [of Hormuz] closed, because they had to be very careful with the reserve stock.
For the remainder of the year, if we get back to a normal state — demand not destroyed, with no further increases in costs of living through September and shipping in place — we’re probably going to see slightly higher fiber production than last year on a global basis. If we continue to see hiccups — if energy and gas prices remain high over time, cost of living issues continue to affect North America, Europe, Asia and Latin America — then it’s that demand side that is going to reduce the demand on fibers, and we’re probably going to be at or slightly below last year.
What is very clear is that the uncertainty being caused by the tariffs and the war will raise underlying costs because [downstream is] going to be holding more stock just to make sure. That means you’ve got money tied up doing nothing, and if you’re holding stock with [borrowed] money, you’re going to be paying more, because interest rates are going up.
Someone in Indonesia told me he had more costly labor doing regulation for Europe and tariff tracking for the U.S. than he had in the production side of his company. That is not a productive cost. It allows you to do business, but you’re not producing anything.
