Growers warned to watch wool flow on to fragile market

Concerns higher supplies could cause correction

Sheep
Australian wool prices had a near-record daily gain of 123 cents a kilogram last week, but higher supplies on offer may quash the recent market uptick.

Australian wool prices had a near-record daily gain of 123 cents a kilogram last week, but higher supplies on offer may quash the recent market uptick.

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Elders analyst says wool market rises are at risk if growers push too much fibre on to the market.

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The wool market likes to break records and it came very close to a new one last week - with the jump in prices on Tuesday being the second biggest rise in the Eastern Market Indicator (EMI) recorded by the Australian Wool Exchange.

This daily increase was only eclipsed by a slightly more dramatic jump in September 2019.

Most of those in the trade had expected a stronger tone last week.

But the small supply on offer exacerbated it in just about every sector of the market, and the main indicator - the EMI - shot up by 123 cents a kilogram in one day.

After such a dramatic rise, there will obviously be a reaction and buyers took stock of their position, reassessed the need to buy and their client's willingness to pay these new levels.

So, the second auction day on Wednesday had a slightly different outcome - with a drop of 21c/kg in the market overall.

After the dust settled on an extraordinary week, the market had increased in price by 9 per cent in local currency terms, 7.8 per cent in US Dollars and 7 per cent in the Euro.

Within the overall average numbers, several different themes are emerging - perhaps temporarily, or perhaps having a more long-term basis.

Superfine premiums continue to gain strength, not because these types are being used to create the traditional superior worsted fabric which we all know they are capable of, but because they are being used to create the softest, warmest natural knitwear on the planet.

The fact that superfine wool prices are still far below the current price of cashmere - but provide an equivalent textile experience - is certainly helping this resurgence in demand and, therefore, price.

Medium Merino fleece, these days considered to be 19.5 to 22-micron, is also moving along at a decent clip and we have now reached $12/kg for the 21-micron benchmark a couple of months earlier than expected.

At the other end of the wool market, crossbred wool is suddenly enjoying a renaissance of its own.

The price movements in this sector last week are sure to cause quite a bit of interest from the other side of the Pacific, where growers in South America have been curling up like the proverbial armadillo with their crossbred wool stocks.

Aside from a bit of fake fur activity in China, the demand for crossbred wool is difficult to decipher.

Greasy stock of crossbred wool is relatively high in China, certainly ample in South America - where shearing is getting underway again - and New Zealand shearers are starting to come across the ditch to help the Australian's peel it off across southern Australia.

But traders have to trade something, processors have to comb something and fake fur is a typical Chinese fashion product which can 'take off' and consume a lot of fibre in a hurry.

So, perhaps mills are just keeping the stock topped-up, just-in-case.

In China, at least, we have real demand from its domestic market for superfine sweaters which has, hopefully, another month or so to run.

The uniform business is steady and reliable - although price sensitive. So, while this year's uniforms may contain high wool percentages, as the price recovers this will become an issue.

Then we have the fake fur trade, which this season is back to the full spectrum of micron input - and not just crossbred like last year.

After all, it is much more comfortable to have some nice soft Merino 'fur' around your neck than some prickly crossbred - if you can afford it.

But the rest of the world is lagging behind China when it comes to providing demand for wool.

Not surprisingly, COVID-19 management is taking precedence in many parts of Europe and consumers are finding it difficult to physically get out to the shops again.

Those retailers with a sophisticated online presence, or an online-only business model, are still doing relatively well.

Their communication channels to the customer have not faltered during the pandemic - or they have even opened up wider, with so many people having more time to shop online without the boss peering over their shoulder while they work from home.

Some of these online retailers are actually increasing their raw material purchases, as sales out-perform budget expectations.

While it remains unlikely that western society will accept the level of government monitoring and control that enabled the city of Qingdao in China to test every one of its nine million citizens within five days following an outbreak, or the Singaporean regulations that stipulate every customer must scan a QR code upon entry to a store or restaurant as a means of facilitating contract tracing, the level of consumer activity in Asia is undoubtedly higher than in the western world.

So, while we wait for the COVID-19 vaccine and for Dan Andrews to drop the 'ring-of-steel' in Victoria, the wool market direction is in the hands of growers collectively.

Already this week, we have seen demand swamped - with an extra 9000 bales dumped into the market in response to last Tuesday's price spike.

Getting a bid out of a Chinese entity has become nigh on impossible, as everyone waits to see how low the market will fall in response to last week's spike - and the new bigger quantities.

Certainly the market was poised for a slight correction after such a massive jump, but the move will definitely be exaggerated with a larger quantity of wool suddenly offered for sale.

Should the coming weeks return to 'typical' volumes - of about 30-35,000 bales per week - the correction will be short-lived and we can resume the upward trend.

If, however, we see the collective grower fraternity push more wool into a fragile market environment, this will quickly snuff-out the flame.

Growers and brokers together can manage the flow of wool on to the market if they choose to think of the greater industry, rather than just their own bottom line.

It will be interesting to see which entities do this, and which take a more selfish approach.

Hopefully, common sense will prevail and the correction will be short-lived and we can pencil in a target of 1400c/kg for 21-micron wool in the not too distant future.

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