Wool market strengthens despite rising dollar | Elders

Lower volumes see wool market continue to strengthen


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AUCTION DEMAND: The wool market continued to strengthen in the past the week despite the rising Australian dollar.

AUCTION DEMAND: The wool market continued to strengthen in the past the week despite the rising Australian dollar.

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Lower wool volumes saw the wool market continue to strengthen despite the rising Australian dollar.

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THE Australian wool market continued to strengthen in the past the week as lower volumes at sales forced buyers to increase activity to feed early stage processing machinery. Prices rose despite the stronger local currency with the Australian dollar increasing from its low of US75.85c early last week to a high of US77.25c on Wednesday night. Consequently the EMI rose by 13c in local terms, but a significantly higher 29c in US dollar.

The superfine wool types all rose steadily, but the strongest rises were seen in the medium Merino types as buyers sought quantity to keep mill machinery turning. The medium Merino categories increased by as much as 30c as did the skirting types and cardings being used mainly for knitwear production. Crossbred wools failed to generate the same enthusiasm and closed the week more or less unchanged.

The northern market indicator closed on 1372c, up 13c. The 17 micron indicator closed on 1661c, 18 micron 1650c, 19 micron 1572c, 20 micron 1466c, 21 micron 1414c, 22 micron 1395c, 28 micron 746c, and 30 micron 609c.

Currency movements often play a large part in the wool market direction over the short term, with many buying limits being provided to an exporter in US dollars and only converted as lots are purchased or at the end of a sale day. For much of 2015 the wool market was supported by a lower exchange rate – at least in terms of prices received by Australian woolgrowers – and to date 2016 has not provided the same benefit. Since July the currency has been trading in a range of more or less 75c-77c and firmer commodity prices have prevented the Aussie from falling further despite the strengthening value of the US dollar.

Some economists are now talking more often about the local currency breaking out of this range to the downside, which will be beneficial again for local wool prices. Westpac chief economist Bill Evans recently outlined the case for the Australian dollar/US dollar to finish the current year buying 74c and to fall further towards 68c by the end of 2017. His view based on interest rate differentials between Australia and the US, as well as some of the sting coming out of global commodity prices is not too far fetched.

With this weeks employment data showing the Australian economy continuing to underperform, and an interest rate in the US all but locked in for December the interest rate differential will certainly become negligible in the near future. How commodity prices fair over the longer term is a much more difficult forecast to make. So much depends on the world’s engine rooms of China and India and their demand for locally consumed and exported products.

The surge in extra capacity for production and export of iron ore et cetera would appear to have peaked following the frenetic expansion phase, but concerns linger about whether the recent price rises in coal, and to a lesser degree iron ore will be maintained. On the oil front, the alliance of OPEC and Mr Putin is helping to increase the base price, but such a marriage is considered tenuous in the current global environment.

Commodity concerns aside, the world economy appears to be relatively stable and growing albeit slowly. Consumer activity remains the missing link if wool prices are to continue their upward movement. Superfine types have broken through resistance levels on the technical charts, and are looking strong. Although 16.5 to 18 micron types are all bunched together at present they are moving together and the price premium over the medium merino wools is now the largest it has been for five years.

The medium micron types still need to break through resistance on the charts, which for 21 micron is another 30c higher. Should the momentum carry it through this level a strong uptrend will develop with the first stop at the previous peak of 1500c. However, demand at present is coming mainly from exporters and topmakers buying just to replenish stocks. Spinners and weavers in some cases have sufficient stock for a while, or are satisfied to continue buying small volumes on a hand-to-mouth basis which is preventing those further back along the chain to develop longer term buying and processing plans.

The next three weeks will be interesting, not only to rid the world of the US presidential circus, but also to ascertain consumer activity at a retail level in the lead up to Christmas. This will set the scene for wool prices in the first half of 2107 that at present look promising, but need a boost from the end of the pipeline to improve confidence.

Superfine: Multiple buyers always improve auction results, and this is certainly evident in the superfine segment at the moment, with the usual European houses being pursued or challenged by several other interests. Now that the superfine types have broken the long-term price connection with medium wools and seasonal conditions support a reduction in supply for the coming season the price outlook is much more favourable than at any time in the previous few years.

Medium Merino: The wool trade remains optimistic but there is a question mark being drawn (in pencil only) about the New Year. Wool futures market prices are taking a step down into 2017 at present, purely based on confidence, or a lack thereof as buyers wait for some more certainty. It will not take a lot to restore confidence and if the market is able to hold current levels with the next two-week relatively large offerings that should be enough for things to get moving again.

Crossbreds: Some signs of life appeared in the NZ market this week with carpet wools finding good support. Australian crossbred wool generally goes into a different end use as apparel and supply of this type is currently plentiful. A quick dramatic cold snap would see sweaters and coats walking off the shelf and something like this may be necessary for the industry to acknowledge the relative price imbalance at present.

- Bruce McLeish is Elders northern wool manager.

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