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AWI reflects on past 3 months

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AWI looks back at the last three months of trading in 2019 with the context of factors affecting the trade then, and now. The wool market had shown relative stability when compared to the extreme volatility that greeted the resumption of sales after the three-week winter break. In this, October monthly market intelligence report.

Australian wool auction sales resumed in early August from the annual three-week Winter recess with various factors of global uncertainty hanging over commodity markets. There is no doubting the concern the US-China trade tariffs had on the global economy, the political and economic roadblock that is Brexit was also causing some paralysis and therefore demand for raw wool was not exactly buoyant.

Added to this is the flow-on effect of record wool prices 12-months prior. Why would this have any effect, you ask? Well, imagine you are a retail label 12-month ago, faced with making decisions around what fibres and fabrics to use in your collections to be sold in the next few seasons; faced with Merino wool at record-highs and the consumer not necessarily willing to pay 30-50% more for a pure-woollen garment, what do you do to protect your business and the trading margins that you need?

The natural answer is to scale-back your use of wool and move to blends or take the risk and put your prices up to absorb the extra cost of the raw material.

Julian Collins of ABMT textiles makes for many high street retailers and some well-known sporting brands and as he said in episode 100 of The Yarn podcast “If you’re making $80 pure Merino T-shirts, you can’t put the price of that T-shirt over $100 which is why we’ve seen more wool-cotton and wool-synthetic blends, it’s just a simple function of business.”

The results of the resumption of sales in August was ordinary for woolgrower sellers to say the least. A$3.79 clean/kg or 21.6% was carved off the AWEX Eastern Australian Indicator (EMI) to see that market barometer at A$13.75 by the end of that month. In US dollar (USD) terms, which is considered a better demand indicator as an estimated three quarters of wool is traded in this currency, the wool market performed even worse by retracting 24.4% or US$2.99 to US$9.24 clean/kg.

September saw the wool markets recover from the opening weeks low of A$13.65 to close the month at the highest point of A$16.09, a A$2.44 or 17.9% gain. The erratic market has no friends with all sections of the trade are crying out for some sort of stability, as large depreciations of inventory value have occurred and significant capital losses realized for many of the export and first stage manufacturers of the pipeline.

The October wool auction sales though have produced the steadying type of market that had both sides of the commercial trade slowly regaining their confidence. The erratic price movements were reduced significantly and saw the EMI close the month just 15ac lower at A$15.94 than the September close. Narrow trading movements, particularly in US dollars is what instils confidence in traders as narrow bands equal smaller or reduced risk exposure to radical price reaction.

October 2019 a steady growth in demand since 2012, for not only the traditional knit and woven wool products, but also innovative new garments and footwear saw that wool price indicator rise from A$9.27 to a high of A$21.16 just one year ago. A very reasonable result of consolidated farm-gate returns over the past six-year period has occurred and the current trading of the EMI at $15.94 is well above the A$14.47 six-year average of the EMI.

But was this rise too much for many downstream users? Demand decay has been present in the wool trading arena and has trended that way for the past twelve to eighteen months. This drop of demand has been witnessed from all global sectors, but the Chinese domestic and European market are the main areas of sales these days. World events have seen consumers tighten their belts with discretionary spending placed on hold as the economy has slowed significantly.

Chinese consumers are increasingly important and linked inextricably to the fortunes of wool growers. China imports 75% of the Australian wool clip, and an estimated 60% of that figure has been remaining in China for domestic consumption. This is a far cry from just 10 years prior when China was manufacturing a similar 75% of our clip but then re-exporting almost 100% of the finished goods to mainly the Northern Hemisphere. It is quite evident now that the Chinese middle-class consumer is the single largest influencer of wool retail purchasing globally. Demand remains the key driver. Restoring confidence and building those demand levels back up is paramount to keeping wool forefront as part of land holders production choices. Until that true demand returns, instability and volatility will be in play.

Source: AWI

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