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AWI Wool Market Commentary (15th March 2019)

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Australian Wool auction sale results were again to the negative this week. The declining overall quality of wools available, soft enquiry and a slightly stronger Australian dollar (AUD) against the US dollar (USD) and the Chinese Yuan (CNY) were nominated as factors, but the much cheaper South African (RSA) wool auction market was the primary cause. All wool types and descriptions were affected to varying degrees which saw the Australian Wool Exchange (AWEX) Eastern Market Indicator (EMI) fall 29ac or 1.44% to 1979ac clean/ kg. In USD terms, the EMI gave up 18usc or 1.30% to close at 1397usc clean/kg.

Australian wool values were unfortunately affected this week by the very weak market that arose out of South Africa (RSA) on Wednesday. Whether we like it or not, wool is traded into, and under a generally free global market and the Port Elizabeth auction saw the Cape Wools Merino Indicator decrease by 3.3%. While traditional Chinese buyers were operating in RSA in the hope the ban would be lifted soon, the purchasing numbers appear to show that that support was wearing thin and waning.

The situation surrounding the import ban of RSA wool into China ultimately has proved detrimental to global wool pricing in the short term. The reality of the ongoing ban on RSA wool entering China means a huge amount of buyer/exporter finances are being tied up with wool that cannot be pulled through the supply chain and be paid for. The initial concerns surrounded RSA growers unable to sell their clips but the major effect was, and continues to be, buyer and exporter finance. There are plenty of FCL’s (full container loads of between 108 and 140 bales each) of RSA wools either delivered into CMP (Chinese main port), on the water to China, or being packed and bales bought and in brokers stores remaining in the buyers inventory with no payment forthcoming.

The longer the ban continues the worse it will get. These buyers will now have to liquidate these wools into other markets and now at prices much lower than what they paid, if they hadn’t already managed to re assign these deliveries. Obviously this has, and will continue to affect the spot auction results in the immediate term. RSA is now very reliant on wool exports to China, with 70.6% of the RSA clip estimated to be going there (very similar to Australia).

China is a relatively new participant in the RSA market with less than a decade of dominant buying activity. The production in South Africa is equivalent to around 14% of what Australia produces, with 360 mkg here and 50mkg ex RSA. (2017/18 full season data). Of those weights, around 63% of the RSA clip is white Merino quality (micron) compared to the 81% of the Australian clip being Merino.

Australian wool values were nonetheless less affected than RSA, but the negative sentiment did permeate through to our auction rooms, particularly on Thursday. Merino fleece finer than 19 micron was most affected and losses of 40 to 50ac occurred. This was made up of 15ac loss on the better wools, whilst average and inferior lots were hammered throughout and depreciated by 70 to 80ac. The 19 to 22 micron area received far better support but still was 15 to 25ac lower.

Skirtings and crossbred types fell away similarly whilst cardings were the only descriptions to hold onto somewhere near their established levels. Next week has over 44,000 bales rostered to sell and fresh orders are required to invigorate some life into the market. The lower quality wool types and descriptions remain dominant in offered volume and are getting harder to place into exporter orders, but past week did see some stronger interest from the top makers as the gaps widen between the better and average lots.

Source: AWI

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