Australian wool market fires up

Rather than slowly increase in price as mills restocked following the annual three week Christmas recess, all the talk pre-sale was how much it would go up.

South Africa resumed auctions a week earlier than here in Australia, and as they had shut down in early December they had a bit of catching up to do. Over there we saw a frenetic start to the calendar year with an 8.8 per cent increase on the pre-Christmas market, which set the scene for a volcanic opening in the Australian auction.

So, with rumours circulating that millions of sheep may have been affected by bushfires, stocks of greasy wool in China running very low, some new business being written and imminent Chinese holidays everyone seemed determined to fill their orders on the first day of sales.

Consequently, the market jumped by a dollar or more on the opening selling day in Sydney and Melbourne. Merino fleece from 16 to 22 micron jumped in price by up to 150c, while all skirting types increased by 80c to 100c. Crossbred wools added a more benign 20c and cardings were 30-40 dearer.

Everyone in the industry sat back at the end of the day and wondered what has just happened.

Wednesday saw a bit more circumspection among the buying fraternity no doubt after a fair bit of chastisement from mill principals the night before. The feeding frenzy in the auction room was way more than expected and certainly more than the current level of enquiry justified.

By Thursday the market was in full retreat mode as buyers had either filled their orders already, or had their buying instructions revoked.

As the smoke cleared in the sale room, although it still lingered around the rest of the country, AWEX's Eastern Market Indicator managed to climb 51c to 1609c in local currency terms, US45c and Euro39c.

AWEX's Northern Market Indicator closed up 79c on 1678c. The 17 micron indicator closed on 2122c, 18 micron 2005c, 19 micron 1909c, 20 micron 1878c, 21 micron 1870, and 28 micron 914c.

Interestingly the increase for Chinese customers buying for domestic consumption was a full one percent less as the Chinese Yuan was allowed to appreciate in the lead up to the trade deal signing meaning that Australian wool became cheaper for Chinese buyers.

The Yuan is now trading at levels last seen mid-year when a US-China trade deal seemed imminent. The Yuan is still some 10pc below its pre-Trade War levels however, not that China has been manipulating it, but it has made wool more expensive for those mills in China who process and sell garments solely in China.

Given that this accounts for more than 50pc of the greasy wool that is now shipped to China this reversal of currency trend is perhaps the most important aspect of the trade deal for the Australian wool industry, and hopefully it will continue for a while yet.

In another boost for farmers the Australian dollar has slipped 2pc year to date and given up about half of the gains it made during December.

Foreign exchange investors are increasingly betting that the bushfire recovery efforts will have a negative effect on the local economy and so are punting the Australian dollar lower rather than higher.

The advantage that currency traders have over wool traders is that their market has the short-term liquidity that enables them to reverse their position and take a different stance in about five minutes if they get it wrong.

Most wool traders are cautiously optimistic at present, but not many are sure enough to take a significant position, especially given the practicality of changing positions if the environment does change.

Most signs in China are pointing upwards again, despite the media's fascination with the slowing growth which saw a last quarter increase of only 6.1pc GDP - still around double America and about 3 times that of Australia.

The newly signed phase one trade deal will boost a few industries directly, but significantly boost confidence in many others within China as it signifies that a resolution is possible to the long running, damaging dispute between the two largest economies on the planet.

While everyone in the textile trade would prefer to have an abundant list of orders to process in front of them there is enough difficulty on the horizon for the retail fraternity to be holding back. In previous times the retailers and wholesalers would adhere to the recommended lead times, giving the processor plenty of time to organise raw materials, plan their production schedules for optimum efficiency and make deliveries in a timely manner.

Nowadays, everyone is taking advantage of the just in time mantra and not making a decision until much later in the season. It seems there is always someone who will oblige those with a last-minute delivery request.

Thus, the processing fraternity is still currently unsettled about what demand they are going to find by the end of this season. Recent textile fair offerings have tended towards the fine and superfine merino garments, and in China at least it seems that greasy wool demand will focus on 22.6 and finer.

Crossbred wools, which are in abundance in the Australian auction catalogues at this time of year may in turn struggle to hold current price levels, although it will only take one spark of fake fur orders to push them through the roof as we saw this time last year.

With the market's initial huge jump, then subsequent correction, all in one week, and now Chinese mills closed for their annual New Year celebrations demand will be a little more circumspect than would have been the case if we have not seen the fireworks last week.

Mills will still need to make purchases in the next two weeks as this wool will actually be processed towards the end of Feb or March when they are back at work, but they will not be purchasing more than the minimum volumes, or they will be letting some of the traders purchase it in the short term, and make their own decisions later.

So, with a veritable flood of wool being put onto the market this week prices will struggle until the pass-in rate balances thing out. Then we should see normality restored and prices gradually increase through until Easter.

- Bruce McLeish is Elders northern wool manager.

LAST SALES: 'Christmas comes early to wool industry'.