The Australian wool market continued to benefit from the favourable exchange rates last week with a small drop in prices overall translating to a small positive movement in local currency terms as the value of the Australian dollar waned against a stronger US dollar.
Overall the market finished seven cents higher in an east coast only sale, with Fremantle again taking the week off.
In USD terms the market was 6c softer, and 22c cheaper in European terms. The market as the single European currency finally picked itself up off the canvas, and fought back to regain some value against the US dollar.
The best quality superfine Merino, the very few lots available, were stronger, but those not up to spec drifted lower as Chinese demand in particular eased for the finer end.
Medium Merino lots found much more attention being paid to them for a change and performed quite strongly with gains of up to 50c in some categories that matched the traditional Chinese specification.
Heavier vegetable matter lots, or those containing other processing faults were discounted accordingly.
Crossbred wools although declining in number as usual at this time of the season struggled to just remain unchanged in price.
Interest in this category remains subdued, with stock mounting along the processing pipeline, but thankfully the peak volume has passed, so less damage is being inflicted on price levels given the relatively low supply.
The carding wool sector also continues to remain becalmed, with processors reporting increasing stocks, and difficulty moving the product along the chain.
Given the negative sentiment around the globe as a result of inflation, interest rate increases, Chinese lockdown inspired supply chain constraints and of course the ongoing 'special military operation' in Ukraine commodities in general are falling.
As Tobin Gorey from CBA pointed out in his daily report, the express train of falling commodity prices is hurtling along and taking pretty much everyone along for the ride. At some stage the storm will blow itself out, but in the meantime, oil prices fell heavily for the week. International wheat prices eased, as did Australian wheat prices, corn prices fell, sugar prices were lower, dairy was unchanged or a shade higher, and cotton fell heavily.
Wool, still classified in some conversations as a commodity held up okay by comparison. Perhaps it is time to revisit the classification of Merino vs wool, and talk about broad wool as a commodity, whereas Merino fits more comfortably into the noble fibre category and is therefore treated as a niche fibre in terms of economic fundamentals, and is influenced more by fashion and high-end demand than macro-economic trends.
Speaking of trends, the freight train of inflation may not be that far away from slowing according to an article by John Kehoe in The Australian Financial Review last weekend. In it, he points out that because most soft commodity prices have declined, they are now ceasing to contribute to inflation like they were.
Freight costs, while still high have also fallen from their peak, with the global freight composite index showing the price of a 40-foot container now back to $US7000, after peaking at $US10,000.
Still much higher than the pre-pandemic rate of $US1500, but again the inflation pressure caused by shipping costs has decreased. Money markets too are easing back on their previously overly bearish predictions, and have shaved more than one percent off the end-of-year interest rate forecast.
Consumer prices will keep rising in the short term according to Kehoe, but the good news is that as the price of a good flattens out, its contribution to inflation is zero.
Even if prices remain above their pre-pandemic levels, but fall from their peak, this is deflationary and subtracts from measured inflation. So, the pain for consumers may be relatively short lived, and hopefully by the time the newest merino garments hit the shelves in September the cost of living pressures may have eased slightly, and hopefully enough to support more discretionary purchases.
Of course, China is a whole different story, and what is happening there is intimately connected to the fortunes of the wool industry, both from an early stage processing capacity, but also as a significant consumer market. It is all happening in China at present. With one combing mill being closed due to local government health inspectors somehow finding a positive COVID result after testing a shipment of Australian greasy wool, thus shutting down that combing mill for two weeks, and forcing 20 people into mandatory quarantine.
Another combing mill in Tongxiang caught fire on Saturday, which will lead to an inevitable shutdown for an extended period. Whilst the re-opening of cities like Shanghai continues in a stop-start manner and people are now able to travel around and visit customers, obtaining production orders for the domestic market continues to be very difficult.
Business for 17.5 and 18.5- micron, which comprised a large portion of the sweater market last year is being replaced to a degree by 19.5 and 21-micron this year - presumably in a reaction to the relatively high superfine Merino prices.
Chinese domestic wool is also coming onto the market, and as it is $2 per kilo cheaper, it is replacing more Australian wool in the price sensitive categories.
Garment makers are also reluctant to place volume orders given the amount of stock already on hand, and the expectation of cheaper prices after the recess, so exacerbating the slow-down in this segment of the market.
Stimulus measures from the government are yet to be announced for the textile industry, and although it is a large industry, such stimulus is not guaranteed to arrive, so people watch and wait.
So, for the moment early stage mills and export traders will continue to purchase greasy wool to ensure adequate stocks over the recess, but will be careful about what they buy, and look to have a clean slate when sales conclude.
