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AWI Commentary – Australian Wool Sales (24 and 25 October 2018)

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The latest Australian wool sales saw large and negative price movement across the offering. Price falls were significant and an average of around 5% was lost from clip values. As the past six or more years have seen price gains predominantly on the back of demand, similarly this rapid retraction in price levels is being caused by the slowdown in buying, mainly by Chinese manufacturers.

All types and descriptions were affected, but once again the super fine (less than 18.5 mic) end of the Merino sector and all carding types were hardest hit. The Australian Wool Exchange (AWEX) Eastern Market Indicator (EMI) closed the week at 1874ac clean/kg, 4.87% or 96ac lower.

In US Dollar (USD) terms the indicator was also affected as the AUD weakened against the USD, on a week to week basis. The USD EMI lowered by 5.6% or 79usc to finish selling at a level of 1326 usc clean/kg. Whilst it is clearly not that easy to explain or predict why markets of any product react in the way they do, on the surface the current wool market behaviour seems to be going against the most logical of thinking. Supply is forecast to be in serious decline and demand for wool products, in particular Merino at retail and consumer level remains strong, yet the market has taken this downturn.

Demand is the key price driver and the most substantial barometer for a product like wool. Supply issues, although influential at various pinch points in time, at both the high and low end, is very much secondary as far as price determination is concerned. The most popular of reflections this week as to why the price fell so hard was the simple fact that exporters to China were experiencing very limited inquiry for new business and any new forward contracts were extremely hard, if not impossible, to come by.

Some pre sale discounting in forward levels offered into China were being reported, and this provided the inevitable weak lead into the start of auctions. This compounded as selling progressed and the first day closed under a very sombre tone as more and more buyers withdrew, almost entirely from their normal purchasing operations.

Prevailing high prices of the past months has proven problematical for manufacturers to pass on through to retail. As the price moved so swiftly upward through the course of last season (up over 500c), the manufacturers were able to use a 2-3 month average (length of supply chain) price to sell out the other end. So the top of the market price was no gauge as to the ability of the current price of wool moving all the way through to the consumer.

It is interesting to note that the machinery demand in China has actually grown this year, with installations of even more wool processing capacity into some parts of that country. This seems to go against the trend as it was commonly thought that high labour rates and higher associated running costs had some Chinese manufacturers looking at other countries for some first and second stage manufacturing opportunities.

Given the trade disagreements with the USA, those discussions may be further hastened. What has changed now though is that factories are prepared to sit it out and leave machines idle rather than running machines at a potential loss. How long that can last is the great unknown.

Next week will see over 40,000 bales offered. The slightly better tone of the market, seen on the final day, needs to strengthen in order to arrest the current negativity.

Source: AWI

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