Buyers extra savage on poor style wools

Buyers extra savage on poor style wools


Sheep
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Bruce McLeish writes about the international wool market.

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A week in the wool market is a long time! After watching the market mosey along gaining or losing a few cents here and there, three triggers suddenly emerged to facilitate a significant shift in sentiment.

Firstly, on Friday last week, the sudden and totally unexpected lifting of the ban by China on South African wool imports caught the trade by surprise.

No reason was provided, just a very poorly translated statement by China's Ministry of Agriculture and Rural Affairs announcing that the ban on animal skins, hides and wool had been cancelled.

Second came the imposition of further tariffs by the US President on a swathe of Chinese goods into America, and just for good measure, the third factor lined up with a fairly significant devaluation of the Chinese renminbi.

The wool market had been struggling for momentum for a number of weeks with failing demand being offset by short supply, with many in the trade wanting, or expecting the market to go down, but the lack of supply was making this difficult to achieve.

In the end however, demand won out as it inevitably does, and one or all of the triggers mentioned above provided the catalyst for the movement last week.

The Australian wool market indicator dropped 59 cents, 52 US cents, and 48 Euro cents or about 3 per cent.

With no signs of the quality of the Australian offering improving buyers were particularly savage on the poorer style wools as expected.

Growers were simply not prepared for the sudden turnaround and consequently passed in 22 per cent of the national offering.

Crossbred wools, after a stellar performance over the past two months saw the bubble well and truly burst - at least temporarily - with a drop of almost $1.50 for the 28-micron MPG.

Does this mean the three-and-a-half-year bull market is over now? Not in the least, but there is probably a little bit more downside in the wind over the next week or two.

The market had been pushing against the tide, on the back of supply concerns, and has received a smack-down to remind it that demand is always the most important factor.

To ignore the market signals from the demand side will inevitably produce a correction of some sort, and it would be prudent to remember the market jump of nearly a dollar on the day that the Chinese ban of Cape wools was announced.

That spike did not last long, with the market drifting back down again over subsequent selling days.

If it were not for the ongoing negative effect of the trade war on the Chinese economy we might see a quick bounce back. But with ongoing unresolved issues on a number of fronts, it is likely to be slow motion.

Crossbred wools, after a stellar performance over the past two months saw the bubble well and truly burst - at least temporarily. - Bruce McLeish

There are some reports of renewed enquiry in response to the cheaper prices, but we will have to wait and see if this culminates in new business actually being done, or if it is merely a fishing expedition.

As is often the case, there are differing evaluations of the current state of play in the US-Sino trade talks. US President Trump said that the trade talks with China have not collapsed, and called the growing tariff war a "little squabble".

While China's top diplomat said that China and the US have the "ability and wisdom" to reach a trade deal.

HSBC reported that the newly announced measures have the potential to knock 0.3-0.5 per cent off China's growth. If extended to include a further US$325 billion worth of Chinese goods, the negative effect could be as large as 1.1-1.2 percentage points of China's GDP.

Chinese retail sales increased by 7.2 per cent in April, well below the expected 8.6 per cent, while industrial production in the same month rose by 5.4 per cent verse the expected 6.5 per cent.

US data released on Wednesday showed that US retail sales unexpectedly fell in April as households cut back on spending, whilst US industrial production also dropped last month - again highlighting the fact that nobody wins from a trade war.

As Rajiv Jayawardena of HSBC noted in the morning commentary there are deeper issues beyond trade being discussed, the current dynamic is a prime example of Thucydides trap, referring to when a rising power causes fear in an established power which escalates in a variety of ways.

Trade discussions are in the media spotlight but the underlying tones are more about nationalistic pride, dignity and saving face in front of their respective political parties and people.

Such complications ensure only the most optimistic commentators are confident of a workable deal being reached. In the meantime, the damage to the Chinese economy, and as a result the world economy, continues. Caught up in the maelstrom is the wool market.

With China now being such an integral part of the consumer market for woollen products, not just the manufacturing centre it was in previous decades, the fortunes of the wool market are currently tied inextricably to the Chinese economy and the ability of the central government to stimulate it.

Even though the European season is slowing down as normal in the lead up to summer, there is still adequate time for a Chinese led revival on the demand front. The next month will be interesting to see if we can find the positive trigger we are now searching for.

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