The wool market in Australia spent another week treading water this week, trying to go down, but unable to do so because of limited supplies of greasy wool.
Fremantle joined the sale roster again so the national catalogue rose to 28,000 bales, which is on par with the same sale last year. Buyers are still worried about limited volumes, as there remains so little wool in the pipeline with which to feed the machines.
On Wednesday the market was a touch easier in USD, but thanks to a favourable exchange rate Australian dollar prices were 5 cents higher with medium Merino types leading the way. On the final day the same pattern continued and the EMI closed another 5c higher making it +10 Aussie cents for the week, while in USD it was negative 10.
Superfine Merino is continuing to ease in price, but medium Merino was still keenly sought after. The price for 21 micron fleece rose by 39c in Melbourne for the week to close just under $A23 clean (higher than 20-micron price) which seems incredible when one looks at the price one year ago, let alone back in the gloomy times of the early 2000s.
Demand from China has until now bridged the gap between the main processing season (November to April) and not only kept the wool moving, but increased prices significantly. Some in China are questioning if it can continue, while others do not forecast a change in price until the New Year.
The 21-micron or Type 55 price at $US17.22/kg in China is now well above the height reached in the boom (and subsequent bust of 2011) of $US16.10/kg clean, as mills scramble for the greasy wool to produce both uniform material and fake fur fabric. Other mills simply need to keep running and the northern hemisphere wools have been shorn, but are still a few weeks away from the processing mill doors.
Turning off machinery is not an option in the modern wool processing facilities in China. The cost of financing the Merino wool required to operate the average combing or spinning factory is becoming a big challenge.
While profits continue to roll in, and stock revaluations remain favourable they can continue to convince their bankers to keep extending credit. When the music stops, and the stock prices in the pipeline are higher than what the market will pay there will be some blood on the floor.
It may simply be a case that the empty pipeline means we never get an oversupply situation again, which is usually the cause of large corrections as increasing production swamps a fragile demand scenario.
Production all over the world seems constricted to current levels by climatic conditions and competing land uses, virtually ruling out a supply side correction. On the demand front the variety of apparel usage with which Merino is now associated, and the trans-seasonal aspects this brings might just be enough to outweigh the price shock currently being felt.
Other markets around the globe have played a part in the current revival of Merino, but China has played a massive part in this as it moves from simply processing and exporting finished products, to consuming a large proportion of the merino fibre within its borders.
Some of the data released last month in China causes concern about the fragility of the expansion and modernisation program there. As the ABC noted in an item by business reporter Stephen Letts this week a number of key indicators across the industrial, construction and retail sectors are slowing to multi-year lows, with retail sales tumbling from almost 10pc growth in April to 8.5pc in May, its slowest pace in around 15 years.
The fact that China’s central bank failed to follow the Fed Reserve in raising rates this week has raised alarm among some economists. Traditionally the People’s bank of China has moved its rates roughly in line with the US to keep pressure off the yuan and head-off capital outflows.
The concern is that China’s growth may be slowing at a time when others are increasing, which could derail the entire global recovery. Add into the mix the looming trade issues with the US which will no doubt be resolved, but may ultimately further restrict Chinese growth and we may end up with less enthusiastic Chinese consumers. Hopefully not, but food for thought.
