Garment manufacturers feel the heat as their suppliers pass on increased costs Increased oil and cotton prices have cut profit margins for textile suppliers such as Hong Kong-listed Fountain Set (Holdings), in turn crimping the earnings of garment manufacturers as the higher costs are passed on. Fountain Set, a leading fabric supplier to garment manufacturers in more than 40 countries, saw net profit plunge 31.9 per cent to $135 million for the six months to February despite a 15 per cent rise in turnover to $2.93 billion. 'Faced with unfavourable conditions, including a substantial escalation in the price of cotton, the increase of fuel prices, economic downturn in the United States as well as the weakening US dollar, our results were less than satisfactory,' the company said in its interim report, released late last month. The cost of cotton yarn, which accounted for 50 per cent of the price for Fountain Set's fabric products, had risen 10 to 20 per cent in the past year but the spot price of cotton had fallen 13.2 per cent to 69.2 US cents per pound from its high in October, BNP Paribas Peregrine said. Early this year, Fountain Set raised its prices to cover most of the increased costs, said Gordon Yen, assistant and son-in-law to chairman Ha Chung-fong. 'The stabilisation of cotton yarn prices and the fact that we increased our selling prices should help us control our costs and margins,' Mr Yen said. BNP Paribas Peregrine expected Fountain Set's net profit would fall to $313 million for the year to August, from $351 million last year, but rise to $391 million next year. Fountain Set has passed much of its cost increases on to garment manufacturers in Hong Kong and the Asia-Pacific region, who account for 82 per cent of the firm's revenues. 'Many Hong Kong shirt manufacturers have been affected by rising oil and cotton prices. US buyers refuse to raise prices, so Hong Kong shirt manufacturers are caught in between,' said Peter Liu Sin-shing, chairman of the textile and apparel committee of the American Chamber of Commerce in Hong Kong. US brands and retailers would not raise prices because they had a wide choice of suppliers all over the world, he added. Cotton prices would drop slightly this year and next, which would benefit textile companies, BNP Paribas Peregrine analyst Mohan Singh said. The price drop would stem from a forecast rise of about 10 per cent in world cotton production to 102.5 million bales in the 2004-2005 financial year. The return of favourable weather for cotton production in the mainland - the world's biggest cotton producer - would also exert downward pressure on prices, Mr Singh said.
