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Wise Geek provides the details: "Lyocell is a fabric most know better by its brand name Tencel. It has a soft finish, packs light and is made from cellulose (vegetable matter), or wood pulp, typically a mix of hardwood trees like oak and birch. This makes it a natural fabric, and it is noted for its durability and strength, in addition to its eco-friendly manufacturing techniques." They explain that lyocell is made "by chipping wood, breaking down the wood fibers with the non-toxic chemical amine oxide, and then placing the material in a spinneret. The spinneret produces long fibers, which are then dried and woven into cloth."
Fine. Clear enough, I'd say. Now we turn to Team TreeHugger for another perspective. They suggest we approach new fabrics with skeptical enthusiasm and here's why: "No doubt you’ve heard the hype around bamboo, soy, or even corn fabric. The idea of finding alternatives to petrochemical-based and conventionally grown options makes us all perk up and we see why many eco-conscious designers are excited about them. Bamboo, for instance, sounds great: it’s a fast-growing plant, not reliant on chemicals, and beautifully drapes the human form. Trouble is, bamboo plantations can displace native forests, and the harvesting and fiber processing are often polluting and unregulated. As with soy, corn, and Tencel (which comes from trees), the processing from plant to fabric is energy and resource intensive. For now, approach these as alternatives to poly, nylon, acrylic or conventional silk and await more info. As always, shop with a plan: don’t fill multiple shopping bags just because the labels say 'eco.'"
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