The wool market recovery is underway

The wool market recovery is underway says Bruce McLeish


Sheepmeat
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A nice shade of green appeared on the AWEX market reports this week indicating rising prices writes Bruce McLeish.

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A nice shade of green appeared on the AWEX market reports this week indicating rising prices.

It was a welcome sight for all after a shaky start on Wednesday which saw the indicator slip 30 cents a kilogram and a few people thought 'here we go again'.

However, with a smattering of demand, a resolution of sorts in Hong Kong, and generally a better tone about the industry buyers hit the pedal to ensure they could fill the orders on hand in the meagre selection available.

With pre-sale withdrawals and passed-in wools mounting up, only a paltry 22,000 bales were available across the nation.

Whilst several early-stage processors have reduced production levels in recent weeks, wool is still required to feed the machinery and there had been some decision making by a select few across the industry that the current levels were too cheap to ignore.

At the end of the small selling week in Australia, the EMI closed down 10c/kg, but managed a 6c/kg-increase in USD, and plus 10 Euro cents, with superfine Merino, cardings and crossbred wools leading the way.

The quality of the offering in medium Merino wool is still making it difficult for buyers to purchase the correct quality, and the holes left behind tend to drag down the Micron Price Guides for this category.

Many in the industry are questioning why the market dropped so low, so quickly.

It has been broadly agreed that the wool market was defying logic and had perhaps become a victim of its small size.

Others looked to blame the buying fraternity, or the Chinese early stage processing industry (because there is very little other early-stage processing industry) but this level of finger-pointing highlights a lack of knowledge or understanding of the industry.

China is 75 per cent of the early-stage processing industry, as this volume of Australian wool is exported there, but those trading and processing there have been as confused as anyone about the wool market of late.

Given some of the stock being held along the pipeline, which is now very high priced, nobody in the trade is comfortable with the last month's event. Yes, demand was down, some say by as much as 20pc and therefore prices would normally adjust by a similar percentage.

As has been well documented the supply shortage prevented the market from taking its natural course, that is until the dam burst.

Like many commodity markets, it over-corrected and has presumably gone down further than it should have. But, the confounding thing for so many in the industry is why the wool market overstepped the market by so much.

A couple of weeks ago, it looked like the market was going to level out, then another big step down occurred. Those who have been resilient enough to front up and buy wool then were quickly slapped back down.

Others are now coming forward in much greater numbers to put a toe in the water. Many of the fortunate ones have run stocks down to virtually zero and cannot believe their luck.

Others have a warehouse full of high-priced stock, or customers reluctant to accept old orders which are now $4 or $5 wrong.

The industry will take some time to sort out these issues, as it always has in the past. Unfortunately given the severity or magnitude of the fall some of the losses this time around will be too significant to absorb, and there will no doubt be some casualties along the processing chain.

But, however harsh it may be, this form of natural selection will ultimately push some of the weaker participants out of an overcrowded industry.

The fact is that whilst the wool production globally has been declining for the past 30 years, the processing capacity has been growing rather than shrinking.

Machines have relocated, principally to China, and there is simply not enough wool or work to go around. In the good times, such as a consistently rising market that we had in the past five years, the weaknesses have been papered over, and people leveraged higher and higher.

When the music suddenly stops, or the tide goes out, there is a proportion of the industry left wanting.

These people or mill owners bleat the loudest, and to a degree spread the contagion through the industry, causing more angst and more caution from the rest. So, rather than a 20pc adjustment in prices, we end up with a 40pc crash.

The recovery is underway, but it will not all be smooth sailing.

Due to the magnitude of the drop, and some of the inevitable casualties that will be left on the roadside, there will be a further blip or three along the way. But with some large retailers now able to fit Merino wool into their product range and still meet their price point, the baseload of orders which flow from this will enable a trade to spread.

Despite what the general media would have us believe about the state of the economy around the world people are still going out to shop. Their spending may be more conservative, but people are traversing the shopping malls from San Francisco to Shanghai.

Allbirds, the retailer of woollen sneakers recently opened a brick and mortar store in Shanghai and are doing a brisk trade.

Many business owners in China report that conditions are picking up again after a dull couple of months.

Whether this is due to citizens returning from holidays or as a result of the new stimulus being injected by Beijing is unknown, but the foot traffic across retail outlets and keyboards is improving. In other markets around the world, positive signs are also showing up.

The business conditions in Russia were reported to be challenging, but at a recent fabric fair, both Marzotto and Reda were showcasing 100%pc Merino business shirt fabric.

What would have been considered a radical change from their traditional men's and women's suiting material only a season or two ago, both companies have just launched a range of shirt fabrics to broaden the appeal of Merino.

The challenge still lies ahead to educate the consumer in regards to the seasonality and easy care and wearability of these garments, but for now the price point discussion is a little less painful.

The story The wool market recovery is underway first appeared on Farm Online.

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