It's similar to the black felt that is used on many cameras. I think acylic or nylon yarn might be better than cotton since the fibers are stiffer and coarser. Typically, you glue it into place with something flexible like Elmer's Glue.
I think it really depends on the camera itself. The channel's on some cameras are more suitable for a foam seal rather than a felt seal, but I have seen it the other way too.
Usually the ones that have to be replaced are foam sealed ones because the foam crumbles as it ages. I think the Kodak Retinas use felt. That stuff lasts a lot longer and I have never had to replace any.
I'm not familiar with the Fuji, so I can't really say what is appropriate. for it.
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