IT was all about the currency last week, as the stronger Australian dollar trimmed some benefits from grower returns at wool auctions across the nation.
In US dollar terms the market drifted, and closed down only 3c. However, in local currency terms the drop was more significant with a 27c decrease in AWEX’s Eastern Market Indicator to 2067c.
AWEX’s northern market indicator closed down 22c on 2140c. The 17 micron indicator closed on 2988c, 18 micron 2688c, 19 micron 2429c, 20 micron 2294c, 21 micron 2243c, 28 micron 944c, and 30 micron 728c.
Strong support from Italy saw the best superfine merino continue to move upwards, but those lots that did not possess the required specifications were discounted accordingly. Medium Merino fleece types continue to ease with a lack of demand from Chinese processors being the main driver.
Skirting types followed their fleece counterparts with the best lines doing okay, but the heavy fault lines easing by up to 50c. The finer crossbreds showed volatility as they often do and fell heavily, while the broader segments were more positive. The carding market continued to ease back as the currency took its toll.
So, with the Australian wool market still drifting more or less sideways as the processing fraternity waits for signals from the retail end of the pipeline the on-going trade war between Trump and China gained a little more prevalence in the wool market.
Obviously, the high price of wool has curtailed some demand in the more traditional sectors, but it is hopefully balanced or superseded by the new innovations.
- Bruce McLeish, Elders
As Chris Wilcox pointed out in the weekly National Council of Wool Selling Brokers of Australia weekly newsletter the US has now added a series of wool products to the latest list of tariffs to be imposed on Chinese imports. These are not finished garments, but categories such as greasy wool, scoured wool, wool top, lanolin, yarn and fabric – although hats did rate a mention. Although this is not a deal breaker for the wool market, and Chinese demand for Australian greasy wool, it does add another question mark to the demand side of the equation.
America accounts for around 11 per cent of Chinese wool textile exports according to Chris Wilcox, with Europe being far larger, and of course domestic consumption now the largest category of all use. The Chinese response to the latest tariff increases was calm and measured, although a little surprising in some respects, and one that may yet prove to be a master stroke in the context of diffusing the issue in the long term.
Rather than the previous tit-for-tat response of adding similar dollar punitive measures to a list of American products, China has elected to reduce tariffs on products from other countries instead. This will obviously disadvantage American interests with their competitors gaining an advantage into the massive Chinese market, but it also underlines and promotes China’s free trade policy. Not that China has always been pro-free trade, having had strong barriers to entry for just about every product over the past couple of decades.
Now they are in a position to reduce these barriers as their domestic producers have reached a point where they can compete better with imported goods, so the government is now able to take a position on the soap box and talk about free trade. The markets saw this response as measured and positive in general, and enough to reduce the ‘risk’ indicator, thus pushing up the Aussie dollar, which has been a proxy yet again for risk trading. Paradoxically, this meant the price of wool in Australia actually went down on the ‘good’ news.
While these trade shenanigans and currency fluctuations are really just the sideshow and the true direction of the wool market over the long term will be driven by supply and demand factors, history does show us that a significant trigger point does often show up at the top of a wool cycle.
Remember the Asian financial crisis in 1997, SARS in 2002 and of course the GFC in 2008, all of which in hindsight contributed in some way to the subsequent downtrend in wool prices. At this stage China’s measured response to Mr Trump’s bluster may be enough to prevent this tariff war from escalating to a full-blown global trade war, although some alarmist commentators are pushing that line. Global growth, and subsequent demand for woollen products is trundling along, not at a huge pace, but steadily enough to stay within the lanes.
Obviously, the high price of wool has curtailed some demand in the more traditional sectors, but it is hopefully balanced or superseded by the new innovations. A sustained, or probably even increased marketing drive will be needed over the next year or three to make sure this momentum continues.
The alternative is that wool succumbs once again to the boom-bust cycle that we have seen so many times. It is almost like we have an opportunity to get out of that space now, on the back of innovative products, the clean and green credentials, and the rise of the Chinese consumer – all we need to do is keep pedalling as fast as possible. Australian wool growers have that decision in their hands over the coming few weeks - hopefully they will choose wisely.
