THE yo-yo factor has returned, with the wool market crashing back to earth last week after the previous week’s gains.
Some of the losses were no doubt attributed to unfavourable currency movements with growers registering a 53c drop to 1970c, while overseas customers only saw a US25c drop in AWEX’s Eastern Market Indicator.
The overall tone was decidedly negative with every category heading south on the weekly market reports. Poorer quality wools contributed to the descent, particularly in the superfine Merino area, while the carding segment continues its rather savage readjustment in price.
Broader Merino types were also easier, but faced with such small volumes it was difficult for them to move anywhere near as far as the finer edge of the clip.
Crossbred wools, already sitting much lower levels – still a quite remarkable 80 per cent percentile for the past five years – were understandably less affected, but still declined by 10c or so.
AWEX’s northern market indicator closed down 49c on 2021. The 17 micron indicator closed on 2743c, 18 micron 2530c, 19 micron 2330c, 20 micron 2262c, 21 micron 2223c, and 30 micron 701c.
With sustained marketing and promotion, the new Merino can overcome the price resistance of the old commodity industry – it would seem a very clear choice for wool poll.
Nervousness is perhaps the most prevalent feeling within the world wool trade at the moment and the indecision about what to buy, when to buy, and how much they should buy is flowing through to create the up and down auction performance at the moment.
Very few participants, if any, are willing the market lower – it is simply just the pervading sense of uncertainty about the right move that has almost created a situation of paralysis. For the past three years trading, processing and selling wool has been a straightforward and profitable enterprise.
The market has been on a steady rise upwards, apart from the odd volatile blip since September 2015 so exporters, traders and early stage processors have been able to more or less operate on auto pilot. Purchase the raw material, ship, transform to the next stage and then bank the profit from the higher price when it passes on to the next customer.
It hasn’t been quite as simple as this, but for a huge proportion of the business transacted at the early part of the pipeline, for those willing to back themselves and astute enough to read the market it has been pretty straightforward.
This easy transactional methodology has masked some of the underlying issues, or papered over them, but now they are beginning to show their proverbial heads again. Price resistance is nothing new to the wool industry as the past 50 years of boom/bust cycles attest, but it is only now, after three years of steady increase that the voices are being heard.
Normally 18 months of increasing prices was enough to choke off demand and see the price curve begin to roll over, giving the industry a regular up-down three-year cycle. With a much longer consistent price uptrend this time price resistance has arguably become more acute than normal.
However, this does not account for the new world order of 2018 where so many things are different than in the past couple of decades, nor the repositioning of Merino into a scarce luxury fibre, that is able to command a very different price point than the commodity wool.
Other factors have been consistently ignored in the happy times of the bull-run over the past three years such as the overcapacity in the early stage processing industry, and the changing requirements in terms of environmental management and ethical procurement.
The ongoing issue of simply too much capacity at the top-making stage has been glossed over or hidden as mills that were unable to be sustained in a commercial sense still finding another life as commission only operators in the good times. This means that there are still too many combing machines for the volume of wool produced and so margins remain virtually non-existent in a true sense.
When the market is constantly rising this fact is hidden, but when things tighten up like now, life becomes much more serious for the struggling mill operators. Because of the concentration of early stage processing in China, that government’s enforcement of environmental rules and taxation compliance seems to be having an overweight impact of the wool processing industry and adding to the pervading sense of hardship.
Add into the mix the ‘normal’ factor of price resistance from the traditional suiting and knitting manufacturers and the industry finds itself with a good dose of nerves. Buyers overseas want to keep the ball rolling, but are reluctant to commit more capital given that prices are still at a high point, and in many cases when their customers are slow to pay for what they have already taken. In an environment of rising interest rates and a slowing global economy asking the bank for more funds to ‘go again’ is difficult.
Despite the nerves, and the issues in the traditional sector everyone involved in the industry right around the globe expects to shortly see more stability and likely a rise in price.
Supply, which has been the elephant in the room is now clearly out in the open and providing a support mechanism for prices. As the Australian spring wears on, hopefully with plenty more thunderstorms and moisture, the volumes available for the peak processing season will become more apparent.
Given that stock levels are virtually non-existent even with the current stagnation any increase in demand will certainly challenge the market. And then there is the ‘new Merino’ whose products are just starting, in many cases to hit the market. The plethora of companies with shoes containing Merino fibre, the growth of the active wear market in places like China are just starting to have an impact in terms of volume. With sustained marketing and promotion, the new Merino can overcome the price resistance of the old commodity industry – it would seem a very clear choice for wool poll.