Australian wool market hit by weaker US dollar

A weaker US dollar again made life difficult for growers and exporters as the Aussie dollar briefly cracked the US74c level during the week.

Understandably 20pc of the offering was passed in with many growers unwilling to accept these prices.

AWEX's Northern Market Indicator closed down 63c on 919c. The 17 micron indicator closed on 1382c, 18 micron 1172c, 19 micron 995c, 20 micron 910c, 21 micron 898c, and 28 micron 396c.

While some are obviously circumspect about the market and thinking that cash is better than running the risk of the market falling further, others are not buying into this illogical soft market and choosing to withdraw and hold.

Despite the amount of wool being withheld, either on farm or in broker store, and very lacklustre demand the market has actually cleared 12,000 more bales during the first seven weeks of the new selling season than at the same time last year.

Obviously, this creates part of the problem, with supply in the market overwhelming demand and thus pushing prices further down. It also means that this wool is not adding to the grower stockpile which is building up at present across Australia.

Overseas mills are quietly voicing concerns about stockpile levels. However, it would seem unlikely that much of this wool 'on hold' will suddenly be pushed into auction at the first sign of a price turn-around.

More likely it will act as a buffer if the market does really shoot upwards, or alternatively be held for many months if not a year or more.

Storage charges will obviously mount up over time, but for a commodity which has fallen more than 50pc this year, and much more than the competing fibres, upside potential in the medium term must be getting stronger purely on a cyclical basis.

Many of Australia's exporters as well as trading companies in China are becoming increasingly wary of this 'snap-back' effect as the proverbial elastic band gets pulled tighter and tighter.

Late last week after the sale of a couple of boxes into the Chinese market, the asking price quickly moved higher as the trade remained wary about being caught out.

This week sees a small offering of only 23,000 bales across the nation. It will be fairly easy for a buyer to be left scrambling to fill a container of a specific micron, especially if the specifications around yield and strength are tight.

Why wool has fallen further than other apparel fibres during the Covid pandemic remains a bit of a mystery, and something which is being discussed at length.

Certainly, the traditional volatility of the wool market is once again coming to the fore - hence the wariness of traders and processors as they contemplate a recovery in prices.

The concentration of early stage processing in China, or having all of the eggs in one basket is also being talked about, but it is probably more an issue of over-capacity, than one country in the very small interconnected world in which we operate.

There are basically the same number of wool combing machines in operation today, as we had back in the 1990s, when the wool clip was three times larger.

So, the fact that we are now seeing some of those mills close down, probably permanently does not surprise.

For the past 30 years they have largely survived on government assistance and economic development momentum, whilst cannibalising each other.

Those early stage processors strong enough, and smart enough to weather the current storm may well find a much better business environment 'out the other side'.

The price comparison with cotton and polyester show that wool, both Merino and crossbred are back to historically low ratios.

Normally at this point in the cycle the industry swings back to using more wool in suiting blends, less polyester, leading to an increase in demand.

Even though wool is relatively cheap compared to the past five or 10 years, this increase in blend composition, and therefore demand is slow due to the overall COVID situation as well as the demise of the traditional suit market.

The number of new suits, particularly in menswear, being sold now compared to 20 years ago has fundamentally changed. How adaptive the processing industry at large has been is questionable.

The growth of active and casual wear has been remarkable over the past 10 years, and this segment has been the first to shrug off the effect of COVID. But, the sheer number of processors still pursuing the traditional suiting market is a drag on the industry.

A business tailored to producing cheap business suits for the millennials, who don't like to wear them, or the decreasing uniform market is going to struggle.

It is a very large historical part of the wool industry, and a very large ship to turn around, but it is possible.

During tough times, smart people innovate, and there will be a plethora of new winners emerging from this crisis in the years ahead.

Already at the 'top of the tree' the luxury brands are getting back on board, and starting to purchase for next year. Their customers are either over, or not into, fast fashion and unsustainable textiles.

Merino is perhaps the "new" post COVID product that the innovators will grab hold of.

Unfortunately, 'wool' has a lot of baggage, and for many it is an easy re-invigoration to switch across to Merino instead.

That does bring with it many challenges in terms of quality, traceability and credibility, not only for the Australian wool grower, but also processors world wide - but they are certainly achievable, as many have already shown.

Preparing for the re-emergence of the consumers is underway. European processors have returned from their summer holidays, and are cautiously reopening dialogue with the supply chain.

There is a lot of shock at current price levels, but those who have been around for a while have seen it before, and know that there will be a rebound, and that today's price level does represent a good buying opportunity.

While it is too early to call a recovery, this week should bring about slightly better greasy Merino prices.

- Bruce McLeish is Elders state wool manager - Queensland.

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