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Weak demand for NZ wool

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As New Zealand heads into its main wool production season, weak overseas demand for the fibre is likely to see the country’s stockpiles rise to the highest level since the Global Financial Crisis eight years ago.

The market for crossbred wool, which accounts for about 80 percent of the national clip, is under pressure due to high levels of finished inventory in China, a shrinking Chinese manufacturing sector, weak European demand following the Brexit vote, and continued competition from synthetic fibres.

Prices for some out-of-favour wool types are at their lowest level in more than a decade, with lamb wool, hogget wool and oddments such as bellies, pieces and crutchings the worst affected, said Malcolm Ching, an executive at New Zealand Wool Services International, and the nation’s largest wool exporter.

He estimates farmer returns for crossbred wools will be between 30-to-40 percent lower than the past two seasons, and says the current market ranks among the three biggest events to weigh on the industry in his 36-year career.

Still, he said the largest price reductions were in the areas of lowest volume, limiting the impact on farmer returns. Reasonable returns remain for body wool, although demand is limited to good quality wool which has been well prepared and can be dyed lighter colours and poorer colour wool which is cheaper and can be dyed darker, to meet a current fashion trend for pale colours with dark contrast.

New Zealand wool exports for the 11 months through November were worth $614 million, 19 percent below the same period last year when booming demand for the fibre saw New Zealand exceed its annual quota allowance to China three months early, and as lamb wool hit record highs stoked by a fashion trend for fake fur jackets.

Wool exports to China, the largest buyer of New Zealand wool, were down 32 percent to $293 million in the 11 months through November compared with the same period last year. China has stockpiles of processed wool, which combined with an environmental crackdown on mills had dented current demand for the fibre, Ching said.

Local wool prices are currently in a deflationary spiral, with some buyers baulking at prices agreed for previous contracts when they could buy the same fibre cheaper in the spot market, Ching said. Some traders had tried to walk away from contracts, or rejected bales on the pretext the fibre didn’t meet specifications, or attempted to delay payment or shipments, he said.

“You have this uncertainty over when the market is going to stop falling and clients say ‘I’m going to hang off, I won’t buy this week, I will buy next week because it will be cheaper’ so it becomes a self-fulfilling spiral downwards,” Ching said. “We have got ourselves in that spiral because of the uncertainty of when it is going to end and it just keeps feeding itself.”

Some wool buyers, such as carpet mills, continued buying through periods of volatility and used the average cost to set the retail price of their products 12 months out.

“You will see in the market reports, some specific types are dearer, some types are cheaper, some types stay firm, it’s all over the place and it is like that for every sale – there is no continuous everything going up or everything going down, although you would have to say overall we are still on the sliding side of the market, not on the lifting side,” he said.

Some farmers had refused to sell their wool at lower prices, and with limited space in shearing sheds, brokers and private merchants were scrambling for storage space heading into the main shearing season with production set to ramp up through the next three months.

“They are starting to get concerned about the amount of space they will have available,” Mr Ching said. “We have been operating over the last few seasons very much from a hand-to-mouth scenario so most people haven’t held onto additional storage. Now that we get into a scenario where wool is likely to be stored, it could become an issue with where it is going to be stored.”

Mr Ching said the wool industry last faced wool storage issues when prices were depressed during the Global Financial Crisis.

New Zealand is the world’s largest exporter of crossbred wool and the fibre is the nation’s 16th largest commodity export on an annual basis.

Source: NZ

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