THE Australian wool market ended the selling season on a softer note as prices eased again last week.
At the close of last week's auctions, the Australian dollar had fallen by 50c, as measured by the AWEX's Eastern Market Indicator.
However, the currency played a large part in this decline with US dollar prices only 19c weaker. The Australian dollar had been appreciating for most of the week as currency traders took a 'risk-on' position, pushing money out of the US dollar pot into Asia positive investments - of which the Australian dollar and to a lesser extent the Kiwi dollar are still among the current favourites.
Nevertheless, the mood in the auction room was less than buoyant, and as with many other commodity and financial markets around the world all eyes were on Osaka for the G20 meeting. Not the actual meeting per se, but of much more interest was the meeting between President Trump and President Xi.
AWEX's Northern Market Indicator closed down 58c on1731c. The 17 micron indicator closed on 2090c, 18 micron 2002c, 19 micron 1984c, and 20 micron 961c.
The Australian wool market has had a pretty stellar year in 2018-19 but failed to live up to expectations by the end of proceedings. A record EMI level of 2116 was reached in August last year, on the back of a flurry of Chinese Fake Fur demand. Then it looked like it would surpass this record in February/March this year when the processing fraternity in China realised that early calls of a nearly 20 per cent drop in production were not going to be far off the mark.
However, since February it has been a struggle to maintain the lofty highs, and the market has been troubled by a lack of confidence, price resistance which had been building for a year or so, and cash flow issues.
The trade war issue will undoubtedly be blamed for bursting the bubble, yet there have been several other factors unique to the wool industry that have been equally important in the longer term. Not that the bubble has burst and left the industry in chaos as has been the case in previous times. 21-micron (for those still able to offer it in this drought affected clip) is still commanding somewhere around $20/kg - or will be when we get enough lots for AWEX to quote it.
Not so long ago we were struggling to keep this important indicator above the $10 mark, which was considered break even. No doubt, with the inevitable price rises, the break-even level is higher than $10/kg clean for the average Merino wool grower, but $20 for 21-micron Merino plus the fairly handy meat price at present still looks very favourable. Just add water and life would be very good indeed.
So, what about the issues that have led to the price correction since February this year. The trade issue still remains front and centre, but with the agreement over the weekend for China and America are to return to the negotiating table it is hopefully moving towards a resolution.
Just add water and life would be very good indeed.
The issue is beginning to bite deeply on both sides of the Pacific, the pressure to find a solution is reaching a critical stage. The demands on both sides are basically huge and probably intractable, however there is scope to find a win-win solution if there is enough goodwill forthcoming. It will presumably reach an interim solution, with some fairly mundane concessions from either side, that can be sold domestically in both camps as a victory, with a lot of points left in the too hard basket.
Other factors that have caused the wool market to come off the boil have arguably been resolved. The price resistance issue, whereby worsted fabric manufacturers in particular, but everyone to a degree, were being told by their customers that merino wool was becoming too expensive.
Rather than the actual cost, it was more a case of the speed of the increase that did not allow retailers to adjust. We have now seen a reduction in prices back to where they were at the end of 2017, which was in the midst of a good selling season for manufacturers of woolen products, and it should be a much easier conversation for them as we head into the next round of exhibitions for yarns and fabrics.
Add into the mix the 'new' criteria of sustainability, natural fibre composition and in some cases provenance, and they are selling from a very strong position - with the added advantage of being able to point to 'cheap' prices at present. So, for the price resistance issue - tick. The low-quality issues that have plagued the Australian wool offering this season have exacerbated the price falls and made life tough for the processing fraternity.
With just enough rain so far to promise a better outlook, we can cross our fingers and hope that the Australian wool clip will return to something approaching normal yield, strength and micron this year. This change in micron will lift clean fleece weights as a natural occurrence, and thereby increase production across the nation.
However, sheep numbers will take several years to rebuild, so it will be quite a while before we can regain the production levels of 2017-18 again. So, for quality - tick (hopefully). For shortage of supply - perhaps better, but not solved yet.
For other aspects of the wool industry which have made life difficult this year such as cash flow, and environmental regulations there seems to be good news too. Although the high prices have made for difficult trading conditions all along the pipeline, traders have found a way, and with the $4/kg reduction for the average micron Merino since the August and February peaks, the strain on finance is much less now than it was.
The environmental constraints in China were an issue, but basically not negotiable, so they have been largely overcome by those mills strong enough to survive - and a higher average yield next year will be music to their ears. In Europe the drive to improve environmental discharge has been going on for much longer, and has now reached the point that is it something they are proud to talk about.
Add in the range of new products which have come to market in the past 12 months, which not many people would have dreamt about a few years ago - a much larger range of Merino wool business shirts, an ever-increasing array of casual and athletic wear, and several companies retailing shoes made of Merino wool.
With all these new products on the shelves, and plenty more in the pipeline, the outlook for the wool industry remains very positive indeed. Whether we will see a positive start to the new season this week remains the only question.
Some positive sentiments in China over the weekend around news from Osaka and the need to fill machines would point towards a better tone for the next two weeks leading into the annual sales recess.