Weaker dollar buffers softer market | Elders

Weaker dollar buffers softer wool market


Wool
PRICE FALL: An easier Australian dollar helped offset a slightly softer wool market.

PRICE FALL: An easier Australian dollar helped offset a slightly softer wool market.

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An easier Australian dollar helped offset a slightly falls in a slightly softer wool market.

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A WEAKER Australian dollar provided some protection against easier prices for those growers with wool in the market this week. Not all types were easier, but rather savage discounts for much maligned poor processing characteristics of tender and high mid-break dragged down the indicators, particularly in the medium Merino section.

The AWEX eastern market indicator closed down US30c or Euro12c. But thanks to exchange rate moves the price movement in Australian dollar terms was only a loss of 3c, to close on 1522c.

AWEX’s northern market indicator closed up 3c on 199c. The 17 micron indicator closed on 2238c, 18 micron 2072c, 19 micron 1791c, 20 micron 1597c, 21 micron 1532c, 22 micron 1477c, 28 micron 798c, and 30 micron 558c.

Seasonal conditions back in March/April were obviously tight enough, and many ewes dropping lambs around that time to produce a weak point in the fibre growth, which has resulted in up to 50 per cent of this week’s offering according to AWEX statistics, having a mid point break of 50pc or more. Obviously the strength of the fibre is not high enough to offset the high mid point in most of these wools, so the processing discounts are applied, and increased due to the sheer volume of this sort of wool in the market.

Supply of wool in Australia is currently running 9pc higher than last season. - Bruce McLeish

Analysis by Independent Commodity Services at Wagga Wagga shows that the volume of very high mid break wool, being those lots with more than 75pc, and therefore very limited processing credibility, are well above what would be considered normal for September. This factor coupled with the current ‘very high’ wool prices, and customers who are becoming increasingly stringent on quality concerns, means that buyers simply have no option but to avoid these wools to a large degree.

It is not all bad news however, as the market is clearly showing the wool producer what he/she will be rewarded for growing, and what characteristics are undesirable. Market forces will balance things out eventually, and some growers may seek to adjust management practices, while others may have to rely on Mother Nature being more favourable next year. This tender high mid-break wool does have a use, like all wool does, so all is not lost. It will find a home being processed into open tops, where the desired length is only 40mm, or be added in small quantities to knitwear blends where the variability of fibre length is less stringent. But these products generally have a lower input cost than fleece wool blends, thus the discounts that must be applied.

Some people in the trade are no doubt beginning to question if wool prices can be maintained at current levels, or if we are about to see a major correction building. Certainly some topmakers in China are beginning to heavily discount forward prices in order to secure the scarce large volume inquiries in the market. The current average Merino category (19.5 micron) is still maintaining its upward trend line in US dollar terms, as it has done for the past two years.

The weaker US dollar, until recently, has created slightly lower Australian dollar prices since May. Now with the currency position reversed the true market direction will assert itself. Supply of wool in Australia, as measured by the number of bales offered at auction, is currently running 9pc higher than last season, or 12pc higher than the last three seasons average. For the calendar year to date, the increase is a more modest 6pc increase. As has been reported of late, shearing is currently well advanced and wools are coming quickly into store to be sold, so it would be safe to assume that quantities will drop off comparatively in the next few weeks.

This may be enough to arrest any short-term slide in price that some are pondering. Of course the other, possibly more important side of the equation is the demand for wool. There are definitely many manufacturers facing difficulties trying to pass on the ‘new’ prices as they enter discussions with their customers this season for fabrics and garments to be sold in the 2018-19 season. Perhaps 50pc of last year’s hefty increase is able to be passed on at this stage, with the remainder having to be absorbed by the manufacturer, or passed back down the chain in the form of lower prices, or cheaper alternatives.

The buying activity of traders and early stage processors in other wool producing countries such as Russia, Europe and Argentina at present is nothing short of frenetic. These wools may be of slightly lower quality, and in some cases a lot lower, but do represent the possibility to reduce the price of the final product by blending with Australian wool, provided the customer’s quality parameters permit.

So the Australian wool market, and of course the global market that follows the prices set locally is challenged at present. Demand is difficult in some cases, sustainable in others, while supply is currently plentiful but may shortly tighten up. With many Chinese factories closing for the next week’s national holiday it is likely that we will have to wait another week to get a clearer picture.

Another 20c easing in prices would not be out of the question, but importantly this would not breach support levels on the charts to indicate a trend reversal, instead the market would still be on course and rising gradually as has been the case for most of the last two years. Nobody in the trade wants to see more volatility, as we saw recently in August, and nobody would welcome a significant price drop either, so hopefully lower supply, moderate demand will support the market within 20c of current levels.

- Bruce McLeish is Elders’ northern wool manager.

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