AT first it was all about the currency, and then supply concerns kicked in to push the wool market up further during the past week.
The Australian dollar traded down as low as US74.24c, its lowest level against the US dollar since June last year. According to HSBC the Aussie has now lost almost 4c in less than three weeks, the trend higher in US dollar has also come with rising risks in emerging markets. Many market participants are shorting the Australian dollar as a proxy to decreasing global growth and emerging market concerns.
Whether these concerns actually come to fruition or not remains to be seen, but the local currency is certainly moving in the right direction for Australian exporters, and perhaps heading towards the US70c handle that many see as fair value.
The wool market jumped out of the blocks on Wednesday on the back of favourable exchange rates and a relatively small offering of only 38,000 bales. In the current market the traditional Chinese Type 55 (21-micron full fleece) is one of the most sought after types of wool being ordered by Chinese indent operators or processors.
According to the AWEX pre-sale data issued on Monday there were 3070 bales of 21-micron wool available in total, and with the current VM profile of the clip probably 60 per cent of these wools would be excluded for high VM or low yield, position of break etc. Spreading 1200 bales across the 10-15 major topmakers in China looking to produce some Type 55 wooltop in four to six weeks time doesn’t fill the machines for many hours, hence the scramble for wool.
Concerns about supply over coming weeks, which is not particularly new and should not be surprising, helped push the market to new record levels in many categories. It was difficult to find any negative movements by the end of the week, and only a section of the broader crossbreds eased a few cents, but the 28-micron category remains tantalisingly close to the four figure price.
Concerns about supply over coming weeks, which is not particularly new and should not be surprising, helped push the market to new record levels in many categories.
Superfine wools moved upwards by a solid 60c, even if just to maintain the premium over the medium Merino sector rather than much actual demand. Medium Merino continues to be the most sought after category at this time of year, but buyers are being forced to cast the net a little wider to secure quantity so some of the previous discounts for faultier lines almost disappeared. Such a strong rise even eclipsed the traditionally optimistic broker valuations in the west, and we saw an unprecedented clearance rate of 98pc at their Thursday sale.
AWEX’s northern market indicator closed up 48c on 1940c. The 17 micron indicator closed on 2771c, 18 micron 2389, 19 micron 2154, 20 micron 2074c, 21 micron 2044c, 28 micron 999c, and 30 micron 703c.
Although there is little sign of the supply squeeze abating anytime soon, with less than 40,000 bales expect to be the norm until the last week of June it is worth stepping back and considering what is happening further up the chain, and where the market could be when supply does increase in August.
Traditionally August has been a tough time to sell greasy wool because Italy and most of Europe is shut down for summer holidays and they have yet to show their wares for the next season and therefore influence the rest of the world. However, recently the early fairs are being held in July, giving the trade an idea about what the new season will be like, and importantly giving the mills some customer feedback so they can start placing orders for greasy wool. Also the emergence, or increasing importance of China as a consumer market, is reducing some of the seasonality of demand from years gone by.
Adding to the mix is the trans-seasonal garments that make up the new consumer’s wardrobe. The Chinese demand for medium Merino at this time of year has been seen before, and can disappear as quickly as it arrives. Last August saw the fake-fur product frenzy create a 100c rise in 21-micron wool over two weeks, which then completely dissipated again over the following three weeks.
The current market is not being driven by any single product as such, but it is certainly being driven by the Chinese mill’s appetite for medium Merino. Fine wools are just moving in sympathy, but not creating new highs (in US dollar terms). Rather they are back within their ‘tidy’ upwards trend established back in September 2015, having briefly broken out to the high side in January this year.
From a technical perspective the fine wools look to be comfortable, and remembering that 19.5-micron is now the average micron Merino and makes up the bulk of the clip these days. The medium Merino segment is having a run at present but some of the largest users, suit fabric manufacturers are facing severe price pressure, and their maximum purchase price is nowhere near the current greasy market. Recent sales, which indicate not only where the spinners are prepared to purchase, but also where the topmakers are prepared to sell are in fact closer to the futures market in the spring.
In the short term, while the supply pressure remains it is difficult to see the market going anywhere but up. All these predictions could of course go out the window if the currency changes significantly, if the trade comes up with a new fake-fur like product, or Donald upsets more people than he currently has.