Ｗｈｅｎ ｗｅｓｔ Ｍｅｅｔｓ ｅａｓｔ

At the end of November， representatives from the CELC， who represent the top qualityof European Linen Industry， arrived in Beijing ;~o meet their biggest customers， Chinesefactories who produce linen yarns. The two sides met under the organization of China Bastand Leaf Fiber Association， and the meeting was held in the China National Textile andApparel Council.

It's not an easy task for both sides. The whole linen industry is undergoing a real hardtime. The decrease of demand drives lots of factories into the blink of bankrupting， andthe widely-beloved wheat entices the farmers in Europe to abandon the cultivation of flaximmediately. The lack of raw material would be a pretty serious problem for all the peoplein the boat of flax.

However， great minds don't always think alike. Upon the question of how much shouldthe raw material increase， and how to get out of this difficult time of linen industry， theEuropean representatives and their Chinese counterparts have totally different opinions.

According to the lecture of Mr. Fr6drric Douchy， theManaging Director of Masters of Linen. the flaxindustry could be divided into two different periods.The distinguish line is the year of 1999.

a.The period before 1999 which is called the West-European demand period at least for what the industry isconcerned (spinning + weaving)

b.The period after 1999 where China is becoming theleader producer of linen yarn and fabric which is called theChinese demand period， again， the industry is concerned(spinning + weaving) because the consumption markets oflinen in the world have not changed (main continents remainUnited states and EU).

From the diagram we can state that in West-Europeandemand period the demand curve and the price curve andfinally the cultivation curve is following each other in aparallel way. However we state aslight delay between the evolutions ofthe curves and they are all in the samedirection:First the demand is increasing， inthe year afterwards the prices of the scutched flax is increasingand another year at~Lerwards the cultivation curve is reacting.So the price evolution is one year in delay， the sowing out twoyears in delay.

How can we explain this? According to Mr. Douchy，the linen industry was active in this period in the high endsegment of fashion which means that linen is IN fashion orlinen is OUT of fashion. IN or OUT. High demand or nodemand.

The prices are in this period only a reflection of thedemand and so prices are increasing because the demand isthere， or opposite. The price level is dictated by the demand.The prices are the consequence of the demand.

In the second period after 1999， the diagrams were leavingthis logic and we state the opposite: when the prices are goingdown， the demand is increasing and when the prices are goingup， the demand is going down.

According to Mr. Douchy. the reason of this unreasonablephenomenon is due to the low production cost in China， linenproducts are more accessible to a larger number of consumers.

The linen products were descending in the consumptionnvramide from the high end segment of fashion to thewider \"Writ ~ porter\" fashion and even to the bigdistribution channels. Mr. Douchy especiallyremarked that the weak demand of 2OO1 was notcaused by the drop of consumption but by thebad crop in Europe of 2OO1 where a lack of offerblocked the offer to the consumer. Conclusionof the period: Instead of the price which is slaveof the demand before 1999， now the demand isbecoming the slave ofthe price， which means.the linen industryentered in a pricesensible market.

Another bigproblem is the decreaseof cultivation of flax，The graphic shows alsothat on the sowing outcurve that there arelimits where the farmeris deciding to leavethe cultivation of flax. if we analyse the curve then we seethat in the last 2O years there are three price levels which aredetermining this turning points:

The first is in 199O where the cultivation of flax droppedfrom 76.OOO ha to 42.OOO ha in three years time. The minimumprice level was then 1，18 Euro/kg.

The second is in 1995 where the cultivation of flaxdropped from 66.OOO ha to 58.OOO ha. The minimum pricelevel was in this period 1，33 Euro~kg.

The third turning point was in 2OO5 with 1O4.OOO haand where now we are at the level of 94.OOO ha. The minimumprice level was in this period 1 A9 Euro/kg.

However， interesting to state is that the minimum pricelevel is increasing all the time from 1，18 to 1，33 and finally1，49 Euro/kg in 2OO5. This is normal because in Europethe subsidy level from the European Community is goingdown all the time plus the cost of transformation is goingup. Up O11 2OO5~ we have to admit that the reactivity on thecultivation level was not high because farmers did not have alot of alternatives due to yearly overproduction. Wheat was athistorical low prices since a long time with world high stocklevels， there was a mountain of butter and milk stock， etc.Therefore， the rent of land for sowing flax remained decadesstable.

Upon the decrease of thecultivation of flax， the CELC gavemostly 3 reasons.

a.The increasing price of oilis a very big worry for the big oilconsunlers in the world and thereforesince three year they are stimulatingalternatives to become less dependingfrom the oil producing countries.

b.The world economy is growing at 5% per year sincemore than five years. This is creating welfare to a lot ofpeople who will improve their feeding pattern. Poor people areeating more farina products (Wheat， corn， ....)， the new richpeople switch from farina products to protein products suchas meat. This changing in eat pattern creates a leverage on theagricultural demand.

c.The changing climate conditions (warming up ofthe earth) seem to have its influence on the results andproductivity of the world agricultural offer. Since a couple ofyears wheat crops are failing in Canada， USA， Australia andRussia which is affecting seriously the stock levels of before.

According to CELC， if the flax industry cannot offer theright price for flax to the farmer (wherever in the world)， flaxwill massively be abandoned at agricultural side. Withoutcorrect prices， the raw material input will dry out. In thegiven circumstances， this will govery fast and not one section of linenindustry (not even scutchers， traders，spinners or weavers) can politicallyinfluence this. Scutchers and spinnersinvested in equipment which can only be used for flax. Thisis not the case for farmers， who can switch very easy from onefruit to another according to the profitability. In that sense，the whole industry is taken in hostage bY this situatiom aswell the scutching section in Europe， the spinning section inEurope and in China. According to CELC， this can only solveby paying the right price to the farmer， so that he continues tosow flax.

The European side puts the blame on the beginning of theChinese demand period， when lots of， too much accordingto the Europeans， Chinese investments were put into the flaxindustry， and resulted in the growth of sales， at the meanwhilethe drop of the price. The flax fell down from the top luxuryproducts to the ready-to-wear， then to the big distributionlevel. \"I simply can't understand. Why don't Chinese factoriessell their yams and fabrics at a higher price?\"

However. the Chinese representatives see totally fromanother angle. According to Mr. Zhang Shiping， the directorof Chinese Bast and Leaf Fiber Association， the price offlax fiber imported from Europe， mainly France， has alreadyincreased twice at 2O%. To any industry this scope of increasein raw material would be lethal. The profit margin for theChinese flax factories is almost zero. If the raw malerial keepsgoing up， almost 5O% percent of Chinese flax factories wouldgo bankrupted. The drastic decrease of demand in Europeanand American markets gives them no choice but have to offera \"better\" price.

CBFLA believes that the development of European andChinese linen industry needs a stable economic circumstance，and to avoid the drastic changes， the price of raw materialshould follow the market rules and follow the supply anddemand. Meanwhile， the price of raw material should alsoconsider the acceptance ability of down stream.

Suggesting Price for New Flax according to Chineserepresentatives:

24Nm CIF Shanghai USD2.55/kg

26Nm CIF Shanghai USD2.75/kg

28Nm CIF Shanghai USD2.95/kg

36Nm CIF Shanghai USD3.3O/kg

39Nm CIF Shanghai USD3.7O/kg

According to CBFLA， though last year some Europeancountries encountered natural disaster and the flax cropsreduced in output， but considering the stock， the supply anddemand is generally in balance. Besides， the damage to eachcountry was different， so it is unreasonableto increase the price in all the Europeancountries.

Meanwhile， CBFLA expressed that theChinese linen industry would self-disciplineto control the export to European countriesfrom the end of 2OO8， when Europeancountries would cancel the quota.

Another breakina advance is that， the bothsides are considering to try to sell and buy the raw materialsin RMB or euros. The reason for that is that according to theEuropean side， if shown in euros， the price didn't increase somuch at all. Meanwhile， if all the prices are balanced in USD，there would be loss due to the change of rate. So the both sidesagree to give it a try: trading in euros or RMB.

Since more than 2O years the consumer countries are notchanging. Still today the biggest consumers of linen are theUnited States (with a strong \"Irish linen\" history) and Europe(completely differently stnactured from the United States sinceevery country in Europe has its own style). Then we nameJapan， South-Korea， and the rest of the world with very smallpercentages. More than 8O% of the world consumption oflinen remains concentrated in the United States and Europe.

According to the European side， the mass productionleads to the devaluation of flax. China has made it possible tolower the prices of linen and by consequence has created moreconsumption at a larger number of consumers who can nowalso wear the image of linen. The big distribution has takenopportunity to increase its margins which has made it veryeasy to put linen in their collections.

Though most flax products were made in China~ they arenot wore in China. The sales of flax products in domesticmarket count no more than 1O% of the total sales.

As a traditional and natural fiber， flax and other linenfibers， like cotton， were the common raw materials for ancientChinese to wear. However， flax has never become a real star inthe modem show. Talking about the reason why most Chinesedon't accept linen products， there are several reasons:

A.Most linen products are too expensive for commonconsumers， and they would be more expensive if they are fromthe top brands. There are mainly three kinds of consumers forlinen products， the foreigners who are in love with Chinesehistory and tradition， the artists who love old fashion apparels，and the people who wish to show their social status bywearing the linen products.

B.The linen products get wrinkles very easily， and it takeslots of time to take care of. Because most people don't buyand wear linen products， most people don't know how tocheck the quality.

Though there are many differences lie in the recognition ofthe reasons of the troubles， the European side and the Chineseside do share the same point of view upon the future of linenindustry: to create a new image for this old fabrics.

The European linen industry at spinning and weaving levelis losing their break-even balance due to the loss of their massproduction items. They swift to more specialised products，however losing a big part of theirturn over. A lot of companies wereclosing. In economical terms， thisis normal and not a lot can be doneabout that. It is known that thesecompanies are investing every year5% of their turn over in creating newcollections for the next season. Thismeans 15.OOO.OOO Euro (21.75O.OOO$). This was before a lot more， sothey have lost a big drive in thepromotion of linen because the pricesare suddenly not profitable any more.

So the questions now are how the whole industry canrecreate this margin at all levels in Europe as well as in China.Flax will never be competitive with other mass productioncheap fibres， even cotton. Therefore the industry has to switchin the short run from a PRICE driven market to an IMAGEdriven market.

PROMOTION for linen is needed toget the right IMAGE for linen so to enlargethe consumption towards the consumerswho are able to pay better prices. It is veryurgent to invest in the first stage in theUnited States and Europe for keeping theImage in the existing markets. Since theindustry cannot keep the low price levelsof today， this means that we have to createthe need to wear or buy linen. Withoutthis creation of need， flax cannot surviveagainst cheaper alternatives. Flax is notan indispensable product for surviving asfood. Promotiom marketing， publicity isthe only way to create this need.

Creation of brands is one of the maiorprinciples of the eleventh five-year plan for textile in China，On top， this will create more added value and switch a wayfrom a pure cheap production based country. As associationwe can consider how we can transfer Promotion know-how atthat level. Since China has very big concentrated cities， maybeat the short run， one project at one city could be started as atest.

Another bi task needed is to develop new markets forlinen. The targeted new markets areChina， India and Brazil， where theweather is always warm and thebuying power is sufficient.

Both sides understand that thelinen industry would be a trade full olpotential. However， it's in a very bighard time. The decrease in demandand the drop of price make the profitrate went down drastically， andneither do European companies norChinese companies have the sufficientcapital to invest more. However， keeping this industry goingon would be the only way and the right way to go.

\"Linen industry is an old industry in France and Europe.It is not just an industry， but also the undertaker of Europeantradition and culture. We don't want to see it fades away.\" Sosaid Mr. Zhang Shipin to Mr. Douchy during the welcomingdinner.