Australian wool market returns to angst and turmoil

Australian wool market returns to angst and turmoil


Wool
A further 122 cents a kilogram was cut from the Eastern Market Indicator last week.

A further 122 cents a kilogram was cut from the Eastern Market Indicator last week.

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A further 122 cents a kilogram was cut from the Eastern Market Indicator last week.

Aa

The Australian wool market returned to angst and turmoil again last week, savagely stepping on the green shoots which had showed a glimmer of hope the previous week.

A further 122 cents a kilogram was cut from the Eastern Market Indicator (EMI) despite about half of the initial offering being withdrawn or passed in at auction.

The best fine wools and those lots matching up with specific orders for non-mulesed and the crossbred sector held up reasonably well, highlighting the depths of despair for the bulk of Merino types.

Some of the medium Merino types were nearly $2 a kilogram cheaper as buyers simply had no instruction to operate.

The Australian market has been operating in relative isolation since the resumption of sales following the auction recess, with the shearing season yet to commence in Argentina, and South African sales being cancelled in the interim as they try to reconcile their export issues.

So, the largest Merino wool supplier in the world is bearing the brunt of the current turmoil which, in most people's view defies logic.

When the other markets resume, which in the case of South Africa will be this week, and Argentina next month, the reaction from the growing fraternity there will be interesting.

Lower demand and the corresponding reduction in price had, until recently, been stifled by an even larger drop in supply courtesy of the drought in Australia.

The worsted suit manufacturers, who are probably the largest price sensitive sector, with the lower prices knitwear coming in second, had already adjusted blend ratios to use more of the cheaper synthetic fibres in their fabrics.

As the price continued to climb through until March this year, many of them struggled, and some no doubt threw their hands in the air.

Other less price sensitive fabric producers were nevertheless struggling to forecast where the market price would be when their products hit the retail shelves.

For a select range of products, where price of the raw material is of small consequence compared to the branding of their product, or their shelf position, the luxury status afforded by an ever-increasing price was a boon.

With the price signals being suppressed - perhaps artificially - by the supply constraints, the market became oblivious to the message from some of the price sensitive sectors.

Has the bubble burst because the market failed to listen to some of the support base? In part, but only in part.

Yes, the price needed to come down to some degree to allow those long-standing suit makers and sweater knitters back into the game.

But a moderate decrease of 10 or 15 per cent would have been sufficient to allow many to resume operation again.

Not everyone in the worsted fabric sector had been forced to stop using Merino wool, with some upskilling their workforce, concentrating on only the high-end fabric types rather than generic, or simply reversing the ratio to only use 30pc wool in their fabric.

The recent price correction, although it can hardly be described as a correction now, more of a rout, is far from a normal cyclical move.

Nobody in the industry has witnessed market conditions such as this before, which is why many are dumbfounded and saying it defies logic.

Previously we have seen the wool market get too high, too quickly, and ultimately the market corrects to a point where participants jump back in, average down their stock price and resume business.

A couple of times it seemed that this would occur, as most thought two weeks ago, but then last week the market fell off another cliff.

Obviously, something is different this time, destroying the confidence of those players who would normally be "getting back in" and allowing the market to steady, consolidate and then start trading normally again.

The dominance of Chinese consumption this time around is a totally new factor.

Whereas previously China has been the manufacturing centre and exporting products to world markets, these days the Chinese consumer has been a major driving force of the wool market success.

Over the past three years, during a normally dull period for the market (August) a new "hot item" in China has led to a spurt in demand - and price.

This year retailers or designers have not been able to inspire the consumer with anything similar to the fake fur or double-faced fabric of previous seasons.

But it is more than just the lack of the current "hot item" missing from the Chinese fashion scene this season.

There is no doubt the rapid escalation of the trade war has damaged the confidence of the Chinese processing fraternity, from retail all the way down to greasy wool processing.

Only last November, Trump and Xi met in Argentina and agreed to sit down and talk to resolve the issue.

The wool market at the time was buoyant and moving upwards, despite some price resistance issues.

Since then, and as recently as last week, Mr Trump has sought to again throw more fuel on the fire by increasing the depth and breadth of the tariffs, presumably to strengthen his negotiating position.

There is no doubt the ongoing uncertainty has affected the consumer confidence in China, and perhaps the wool market has been walking the tightrope or standing on a precipice because it did not react to earlier demand signals, courtesy of the drought induced supply issues.

The crash has been spectacular in dollar terms, although in real percentage terms until last week at least, similar to previous corrections.

It is just that we were at all-time record price levels, so the numbers look so much worse.

As spectacular as the fall has been, and as despondent as many have become, there is over the past few days, much more activity taking place on the trading desks around the world and inside of China as well.

Hopefully, next week will not see another false dawn, but the beginning of a recovery in stability and confidence, although admittedly the world economic scene is still providing enough angst to make it a slow process.

The story Australian wool market returns to angst and turmoil first appeared on Farm Online.

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