Market spike unlikely until retail spending resumes after global COVID-19 restrictions start to lift

Consumers wanted in quest to boost wool demand

Sheep
A market for Merino wool masks is slowly emerging, but a return to retail spending by northern hemisphere shoppers is needed to help boost demand for Australian fibre.

A market for Merino wool masks is slowly emerging, but a return to retail spending by northern hemisphere shoppers is needed to help boost demand for Australian fibre.

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Australia's wool market slumped after auction recess last week as global consumers remain MIA.

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The wool market's 'Annus horribulus' (or horrible year) continued last week as auctions resumed in Australia, with a savage drop in prices due to a lack of resolution in the COVID-19 situation, a weaker US Dollar and a relatively large offering of wool.

Early expectations were for a price drop of about 50-60 cents a kilogram in local currency terms to make up for the currency movement during the break.

When auctions closed for the recess, the Australian Dollar had been trading at 0.692 cents to the US Dollar. As auctions opened this week, it was closing-in on US0.72 cents - making wool much more expensive in US Dollars and Chinese yuan.

Given demand had not improved during the auction recess - apart from in a small niche segment of 17.5-18.5-micron short wools - buyers were reluctant to purchase too much of anything.

A lack of firm orders, coupled with cash constraints, was always going to make it tough for the market to absorb the large wool offering - despite having had no auction sales for three weeks.

So, after the dust settled and the pain eased, the market had dropped by US0.63 cents.

As mentioned, the currency movements during the recess needed to be accounted for and that meant the damage in local currency was a staggering 128 per cent drop.

There were no real winners across the micron ranges, with all types and descriptions falling by similar percentages.

The good news is that the Australian Dollar is getting to the top of its range - at least by some commentators' advice.

So we are less likely to see the added burden of currency adjustment being a factor in coming weeks.

Of course, there are still 88 days until the US Presidential election, so world currency markets are likely to remain unstable for at least that period.

For the wool industry, the key is - and always has been - demand from consumers.

At present, with the COVID-19 situation causing angst across the globe, the volume of retail demand has fallen by 40-50 per cent.

But there are some bright notes.

Markets such as for athletic and casual wear are seeing an uplift, along with some enterprising operations making face masks from superfine Merino wool.

But sales of 'bread and butter' garments, which provide the bulk of consumption, are down - and significantly.

Retailers are hoping, like everyone, for some stability or normality to return - and that when the holiday makers return from European or American beaches, they will do some serious shopping.

The autumn-winter season is just around the corner for the northern hemisphere folk and there is a possibility that the situation will get better - enough - for a boost in consumer activity.

Governments across the world continue to roll-out stimulus packages to keep economies from going into freefall.

In Europe, a casual 750 billion Euro has been dished-out in a combination of loans and grants.

This, together with an improvement in German new manufacturing orders - which jumped by 28 per cent during June (well above the forecast of a 10 per cent increase) - highlights the general trend of recovery in Europe, albeit slowly.

Nobody is mentioning the 'V'-shaped recovery these days, as had been hoped for a couple of months ago. A 'backward-leaning L' seems to be the most likely scenario nowadays, as most countries battle a second wave of virus pandemic to some degree.

In the US, there is a growing optimism that law-makers will pass the next trillion-dollar stimulus package - when they get over their party-political bickering. This amount of cash will certainly help the struggling economy in the world's largest consumer market.

Other positive developments often get drowned-out by the sensationalist media grabs or the anti-maskers, but steady progress is being made in: several coronavirus vaccine trials; the seven-day rolling average of reported cases in the US is starting to trend lower; and other countries are learning how to manage the second and third waves of infections without going back to a Victorian-style of lockdown.

If one puts the sensationalism to one side, it would seem progress is being made. For the wool industry this is obviously incredibly important.

The current wool price level, which is about 40 per cent below last year, is not solely (but a heck of a large part) attributable to COVID-19.

The market had undergone a correction, and had taken a hit from the US-Sino trade war. But most of the damage has been as a result of the demand destruction brought about by this nasty little virus.

Getting consumers back out into the shops is the key to getting the wool price to move upwards again.

Balancing the supply side of the equation towards a more manageable 30,000-odd bales per week will help.

And with many early stage processing mills only operating at 50 per cent capacity, this seems like all the industry can consume at present.

Orders will come for a few last-minute creations for the current season, and then processors will need to focus on the new processing season from October onwards.

But the stock in the pipeline needs to be cleared, so the recovery will be slower as a result.

Nevertheless, wool is volatile and at some point before Christmas we will see a spike in demand creating angst about rising prices.

The world is still awash with micro-plastics. Natural, noble fibres - such as superfine Merino wool - will be far easier to sell to the educated, environmentally aware consumer when they do return to the market.

There was some evidence of the more astute buyers, or those with deeper pockets, who could see last week's market as a buying opportunity to think that we will see better times just around the corner.

In the meantime, everyone should 'mask-up, with Merino'.

The story Market spike unlikely until retail spending resumes after global COVID-19 restrictions start to lift first appeared on The Land.

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