THE wool market in Australia continued to ease last week, although a falling local currency shielded Australia’s growers from the worst of it.
With the ‘off season’ among processors and a fair degree of price resistance many in the industry have been calling for some sort of correction, and perhaps it has now occurred to a sufficient degree so that many are hopping back over the fence to say that prices will start to increase again shortly.
AWEX’s Eastern Market Indicator closed down 21c on 1992c. AWEX’s Northern Market Indicator closed down 24c on 2050c. The 17 micron indicator closed on 2869c, 18 micron 2583c, 19 micron 2346c, 20 micron 2225c, 21 micron 2186c, 28 micron 904c, and 30 micron 701c.
Interestingly, since the Week 6 sale following the July/August recess, eight weeks ago, the EMI has declined by US71c/kg, but actually increased by 2c in Australian dollar terms.
So, the industry has achieved the correction that many were calling for, but the currency movements have meant that Australian growers are still at the same price level as we were back in early August.
Of course, the EMI is a basket indicator and does not necessarily reflect individual micron category movements or those of individual types. There has been some adjustment or realignment of the price basis over this time with superfine Merino in general getting a little more expensive in comparison to medium Merino, broader crossbreds easing a little and cardings have also eased quite a bit over that time.
Since... eight weeks ago, the EMI has declined by US71c/kg, but actually increased by 2c in Australian dollar terms.
Last week the market made similar ‘commercial’ adjustments with processing performance, or lack thereof, penalised significantly. In general, the drought effect on the Australian wool clip has so far been less severe than many processors would have expected, on average at least.
According to Scott Carmody in last week’s AWI weekly report the average yield is down 1.5 per cent, micron is 0.5pc finer, length 3.3mm shorter, and VM 0.3pc less than the previous year. Within these average numbers there will obviously be a fair range but the market is being particularly severe on lots with poor processing characteristics such as overlong superfine wools with poor strength and a high mid-break.
The difference in price between a good 16.5-micron Merino and what the trade dictates as a poor line is 200c or sometimes more. These poorer lines, some drought affected, and some just a result of overzealous breeding, are still worth quite a bit of money, but not the premium currently being paid for the best lines.
It is quite appropriate that the processor dictates what is the best quality, and therefore highest price wool, rather than those producing it. Those with a few grey hairs will remember the heady days of the late 1980s when the artificial market was rewarding people just for growing wool, with very little regard for the actual processing performance of it – and the subsequent market reaction when a free market was resumed. A drought doesn’t make it any easier to grow the wools demanded by the processing trade, but it is a timely reminder that those who follow the market signals will be rewarded in the longer term.
Those further along the processing chain have been given a significant wake-up call about the severity of the supply situation with the release of the AWTA test numbers for September. For the past couple of months people overseas have been hearing about the effects of the drought, but not fully understanding how severe the impact on supply would be. For many the official forecast of a 5-6pc reduction, or the rolling weekly auction figures did not fully explain the situation.
Last week’s publication by AWTA showed that September’s volume of wools tested - therefore the amount of wool produced – is down significantly from the previous year. In the three months of the current season Australian wool production has decreased by 11.3pc compared to the same period last year. For those mills with a large capacity to feed and orders beginning to flow back from the retail end of the pipeline it is a matter of some concern. For the ‘average’ combing mill producing 10,000 tonnes of wooltop per annum the weekly consumption is between 1500 and 2000 bales of greasy wool.
There are a couple of mills that dwarf this capacity number, but probably at least 10 in China that fit into this size category. With Northern Hemisphere stocks all but depleted now production staff are beginning to wonder where they will be able to procure their supply. Of course, the wooltop needs to be sold to a spinner to make the production viable, but that is suddenly starting to happen after what has been a slow month.
Supplies from South Africa and Argentina only account for around 10pc each of Australia’s volume and there is a large question mark over the availability of the Argentinean clip this year given their financial issues at present.
With China resuming full scale activities after Golden Week celebrations, the market having had what most people agree is a decent correction – in US dollar terms – supply numbers getting scary and the clock ticking for autumn/winter 2019-20 orders to be written the scene is now set for a change in direction.
Prices are still being discussed with a degree of angst in some quarters, and many have one eye on the global economy, whose cogs are not exactly moving in synchronicity at present. The US economy, despite Mr Trump’s unorthodox approach, or perhaps because of it, is powering along. Italy’s new government, a very disparate coalition, is upsetting the boffins in Brussels, and dragging the Euro down.
Many have negative things to say about Russia’s tactics, but the rising oil price is helping boost spending there, and of course the US-Sino trade war is far from settled at present. Overall, providing there is no catastrophic event the next few months should see the wool market gradually, with a touch of the usual volatility, increase as demand once again outstrips supply.