Dreaded yo-yo effect worries wool market | Elders

Dreaded yo-yo effect worries wool market

Wool
The Australian wool market continued to wobble about last week, with the dreaded yo-yo effect returning.

The Australian wool market continued to wobble about last week, with the dreaded yo-yo effect returning.

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The Australian wool market continued to wobble about last week, with the dreaded yo-yo effect returning.

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THE Australian wool market continued to wobble about last week and perhaps the dreaded yo-yo effect is returning, where the market tends to bounce up and then down, from week to week.

The previous auction period had seen greasy wool supply constricted to such a point that it pushed prices higher, even in the current subdued demand environment.

Then last week we saw the market more or less continue its zag downward, pushed further down by a stronger local currency, although again the extreme shortage of some wool types saw prices start to increase later in the week.

Overall the market closed down by 18c in local currency terms as a stronger local currency shaved off some of the cream off the top.

Given that last week's price levels are more than 50 per cent, or nearly $5 higher than 12 months ago, when the despair of COVID was pummelling the market, current prices are actually pretty good.

In US dollar terms the market was virtually unchanged, with only 4c being trimmed off the market indicator.

In US dollar terms the market was virtually unchanged, with only 4c being trimmed off the market indicator. - Bruce McLeish, Elders

The self-regulation of the market has worked a treat, with growers withdrawing supply in a time of reduced demand to halt the fall in prices.

AWEX's Northern Market Indicator closed down 16c on 1417c. The 17 micron indicator closed on 2393c, 18 micron 2005c, 19 micron 1633c, 20 micron 1335c, 21 micron 1233c and 28 micron 475c.

Now that the supply and demand is apparently in balance, people will rightly ask "where to from here".

The Italian concerns have been active in recent weeks, albeit working remotely from the beach, but they have now returned to the office, and are making their presence felt even more so.

They do have a bit of ground to make up, after their COVID induced absence last season, hence their increase in activity now.

The Indian mills disappeared when the market started to wobble, as they are wont to do, but have re-emerged again now to play an important part.

Chinese players have been sitting back waiting for retail signals, which are still forthcoming, but as a whole they seem to have decided that the market has probably gone as low as it will go, so buying activity from the traders has increased again.

The previous couple of weeks saw only the larger top making mills picking up wool consistently, but now everyone has put at least a toe back in the water.

So, the outcome for next week, with around 37,000 bales on offer, and no South African offering, should again be a more positive tone.

It is the uncertainty of the current economic and political backdrop which has seen many buyers holding back in recent weeks, as well as the normal cyclical trend.

The supply chain disruption is ongoing, and last week was brought to light with the release of German factory activity falling to its lowest level in six months as a result.

Although a PMI reading of 62.6 was still registered in the HIS Markit survey, and anything above a reading of 50 indicates growth, nevertheless a 3pc drop is significant and largely due to the slowness of getting raw materials into a factory.

Chinese PMIs also missed the mark, but not due to the supply chain bottle necks.

Their lower figures in the non-manufacturing sector were directly attributed to the COVID-19 Delta variant resurgence, where the lockdowns, and threat of lockdowns slowed activity.

Also weighing on the nerves of Chinese consumers is the current death spiral of the second largest property developer in China.

According to a report by CNN, Evergrande is in dire straits and has warned it may default on its substantial debts.

Its share price on the Hong Kong exchange is down 72pc this year, but it is the flow on effects to other share prices which matter to the average Chinese consumer.

Already technology stocks and the private education sector have been whacked with a large stick, and potentially more industries may come under the government spotlight in the lead up to the National Congress in 2022.

The Chinese stock market, where a large proportion of citizens invest their savings is already down significantly this year, which has the retail sector slightly concerned as they enter a strategic sales period.

So, as always, there is a caveat to the normal cycle kicking back in, and wool prices climbing again after the usual spring dip.

In this case the dip has been minimal, compared to the previous two years, and odds on we will still see a recovery in prices as we get closer to Christmas.

But, the Chinese domestic market has been the saviour for the finished goods market over the past 12 months, and it is perhaps feeling a little unwell at present.

The current wool prices as mentioned are pretty good, at least for merino and fine crossbreds, and those who need to sell now for cashflow reasons or risk management preferences are receiving a reasonable return for their endeavours.

As the processing cycle moves on, new demand will inevitably emerge and we can feed more supply onto the market, while maintaining current prices - or even increasing them providing the currency doesn't head back to US80c.

Generating that new demand, on top of the cyclical increase is where the benefits in price really flow, and now that the world is slowly opening up again after COVID, the conversations can restart.

A lot of marketing campaigns have been on pause, given the lack of foot traffic and customer interaction, but in places other than Sydney and Melbourne shoppers are out and about again.

The plethora of new retail websites offering a merino experience totally different from the traditional way in which wool has been marketed in the past is growing every week.

The fact that most of these companies have gaps in their product ranges, in certain colours and sizes highlights not only the ongoing supply chain disruption, but importantly the fact that products are actually being sold.

Consumers are wanting the story, the experience and the product.

While nobody is predicting a super cycle, the next year or two should be very good providing we keep managing the supply demand balance as we currently are.

MORE READING: 'Wool prices firmer across the board'.

MORE READING: 'Supercycle won't spin out for wool'.

MORE READING: 'Animal welfare, pain measured to improve quality of life'.

- Bruce McLeish is Elders state wool manager - Queensland.

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