As a walk around the medina in Marrakech or the streets of Islamic Cairo proves to even the most casual observer, the textile industry has a long and storied history in North Africa. Tourist suitcases in the Tunis airport are crammed full of traditional rugs, while cargo ships in Port Said are loaded down with brand-name undergarments and 400 thread count sheets. However, while the weavers crammed into tiny side streets provide a sentimental reminder of the industry’s centuries-old heritage, it is nonetheless a very big business these days.

Not only do textile and clothing represent some of the largest industrial sub-sectors in some North African countries, but they also provide significant employment opportunities, while positively contributing to the trade balance. And in spite of the end of the Multi Fibre Agreements in 2004 lifting global quotas on textile sourcing that had previously aided North African exporters, the largest regional producers — Egypt, Morocco and Tunisia — have still managed to chisel out growing shares of the US and EU markets; in fact, 12 months after the liberalized regime was put into place, Egypt’s textile exports to the US increased by 8%.

Yet while Egyptian, Moroccan and Tunisian producers have long faced a competitive marketplace, they are now grappling with a volatile cotton market and wage pressures, while slowing consumption brings down demand.

The uncertainty is perhaps most pronounced in Egypt, the region’s biggest producer, where textiles and clothing represent the largest manufacturing segments. The bigger firms in the country each employ tens of thousands of workers and the sector as a whole accounts for 35% of the industrial workforce or roughly two million people.

Raw production is up by 37% this year as of October, with growers having long benefited from one of the country’s best-known locally grown commodities: Egyptian cotton, which is reputed to be among the finest natural fibers in the world. In recent years, the country has expanded production of acrylics as well, serving as key supplier for producers in both Asia and Latin America.

Egypt’s vertically integrated manufacturing operations, combined with a fortuitous geographical location and competitive labour costs, have attracted investors from around the world, and supplies everything from shirts for US retailer, Gap, to towels for British chain Marks & Spencer. The country has also attracted firms from other major low-cost textile producers, including Turkey and Pakistan, who have sought to take advantage of trade agreements and attractive wages.

This has translated, at least until now, into a relatively robust performance on the international stage. While Egypt’s textile sector was unable to avoid double-digit declines during the global slowdown — when outbound shipments dropped by 23% over the first half of 2009 — the sector staged an aggressive recovery, with exports rising by more than 50% over the first half of 2010.

However, 2011 looks set to finish up as a far more challenging year. The Alexandria Cotton Exporter’s Association, ALCOTEXA, for example, has seen export commitments for the 2011/12 season, which began in September, drop to roughly one quarter that of the previous year thus far. Part of this is due to the exogenous factors, but the ousting of former President Mubarak has unsurprisingly had dramatic implications for Egypt’s economy, both in terms of the short-term impact of the ongoing unrest, as well as the longer term challenges of untangling the former administration’s extrajudicial involvement in the country’s markets — and the textile sector has not escaped unscathed.

Given the role socioeconomic factors played in the Arab Spring, it is perhaps unsurprising that increasing wage demands have emerged as a key offshoot of the political movements. Egypt’s El Nasr Clothing and Textile Company, for example, faced down a strike threat earlier this year, but was forced to offer a number of concessions, including a 15% increase in wages across the board, an increase in allowances and the promotion of over 1,000 employees. The new terms accounted for more than two-thirds of the company’s LE 11 million loss in the recent fiscal year. Strikes or threats of strikes by thousands of workers have also hit other major firms, including Alexandria Spinning and Weaving and Mega Textile.

The opaque nature of Egypt’s privatization campaign during the Mubarak era has also clouded the sector’s short-term outlook. A number of companies have been targeted or suggested for re-nationalization following allegations of corruption, but perhaps the most salient example is that of Shebin al-Kom Textile Factory, north of Cairo, which was re-nationalized by court order in September.

The decision was welcomed by worker activists, who had contested the heavy numbers of layoffs in previous years under the factory’s owners, Indonesia-based conglomerate Indorama. However, since re-nationalization, the factory — which previously supplied materials to global brands such as Adidas — has faced a number of difficulties in restarting operations due to a lack of appropriate infrastructure for domestic-orientated production and a scarcity of inputs.

Compounding the uncertainty is the dramatic volatility in the global cotton markets, which saw the price of cotton rise by more than 140% in less than 18 months to reach a record of $2.17 (LE 13) per pound in early March. Part of this was driven by increasing speculation, but supply disruptions — including an export ban on India last year, combined with flooding in Pakistan and a poor harvest in the US — have also played a significant role.

While the high prices tightened margins, the country must now contend with an equally startling decline, to around roughly $1 (LE 6.02) per pound in recent weeks, thanks to an excess of physical supply but a weakening demand — which does not bode well for Egypt’s export-oriented producers.

The industry represents Tunisia’s largest manufacturing sub-sector, accounting for around 5% of GDP. The ousting of former President Zine El Abidine Ben Ali brought the country’s economy to a temporary standstill, dramatically impacting both inbound capital and exports in the textile sector. Investments in the textile industry fell by roughly one-third compared to the same period in 2010, for example, while strikes have disrupted production. Unlike Egypt, however, in spite of weakening global demand, the country’s textile exports have continued to inch upwards, with goods bound for Europe — which accounts for some 97% of the sector’s total production — up by a marginal 3.6% year-on-year for the first eight months of the year.

Morocco, which has managed to sidestep most of the political volatility that has swept the region, saw an even greater jump in European exports, shooting up by 24.2% to €120 million (LE 941.77 million) between January and August. However, concessions from the government to address socioeconomic concerns — prompted in part by the Arab Spring — have led to an increase in the minimum wage in July, which has further inflated operating costs.

Still, while the cotton volatility is concerning, the domestic concerns that are hobbling North Africa’s textile industries appear to be short-term in nature, dependent in large part on the continuing resolution of post-revolution issues. While the competitive advantage the countries benefit from in terms of operating costs has been lessened due to increased wages, the overall impact on the sector may be limited, as evidenced by the case of Turkey, which has nearly double the minimum wage of Morocco and Egypt but still serves as the second largest exporter of clothing and textiles to Europe. The governments are also aggressively seeking to protect a major source of employment and revenues during this particularly sensitive juncture. In Egypt, plans to revisit the textile-rich Qualifying Industrial Zones have been proposed, in a bid to increase the percentage of cost-effective Egyptian sourcing under the agreement, while discussions with the Turkish government led to an exemption for duties on Egyptian cotton.

The textile industry of North Africa has managed to eke out a share of a competitive global market. While 2011 has proven to be among the more challenging in recent history for major producers, if Egypt, Morocco and Tunisia can overcome domestic turmoil, their long-term performance seems all but assured. bt

Robert Tashima is the Africa regional editor with the Oxford Business Group, a leading provider of economic and political intelligence about the Middle East, Africa, Eastern Europe, Asia and the Caribbean.