Confidence in the wool market starting to erode

This week the AWEX eastern market indicator (EMI) declined by another 60 cents finishing on 1833c/kilogram, clean, even with a more confident tone reported in Sydney's Thursday auction.

According to industry analysts the ease of price can be attributed to three elements - the removal of China's ban on South African wool, the flare-up of US-China tensions and a decay in confidence caused by a slowing demand.

The Chinese economy is vital for the prosperity of Australia's wool industry with three quarters of Australian product sold and processed in China.

Over half of all the wool garments produced in China end up in their domestic market.

Australian Wool Innovation (AWI) trade consultant Scott Carmody said although prices remain reasonably strong historically, there is a definite lull in confidence.

"Whether or not the market bounces back to where it has come from we don't know," Mr Carmody said.

"We have been expecting this price back-off to come come for the last six to seven months but the market continued to drift along.

"It's a tricky situation at the moment and a few elements going on at the same time are compounding it."

Mr Carmody believes the demand for wool has been eroding for the last six to 12 months.

"When we hit the highs in the market back in August, we were already seeing a bit of decay in demand back then," he said.

"It's taken almost 12 months to surface. Factories went through their cheaper stock, suddenly got burnt on buying expensive wool and now they are trying to find a level where they can sell product into the market again and make money themselves."

He said it revolves around the global economic situation where the consumer has reverted back to their cautious spending nature that was seen back in the late 90's up until the period between 2010-12.

"The consumer has become very cautious and tending to not spend their money," Mr Carmody said.

"The areas we have identified is the middle class in China and also in Europe. It is getting very soft in the spend."

National Council of Wool Selling Brokers of Australia executive director Chris Wilcox said by China importing scoured wool from South Africa again without any restrictions means there is an additional supply of wools available to Chinese mills.

He also said the Trump Administration surprised most observers by announcing that 25 per cent import duties would be imposed on around US$200 billion of imported products from China, an increase from the existing 10pc.

Those products included wool products including greasy and semi-processed wool, wool yarn and fabric as well as wool carpets, but importantly for Australia, not wool clothing.

Mr Wilcox said the situation made the outlook more difficult than in the past two years for Australian wool.

"While the flare-up of the US-China trade war doesn't directly affect wool, it does add to the uncertainty for the global economy," he said.

AWI CEO Stuart McCullough said there has been a drop in Australia's biggest consumption market, China, and with no growth in Europe and Japan, it has to have an effect.

"The synchronised and harmonised growth we had in the world economy for the past four years, doesn't seem like it is going to be there in the future," Mr McCullough said.

"Not only will our product will be affected, but consumer spending habits as well as dropping confidence."

Mr McCullough said to have a rise in the market, demand must be slightly above supply.

But if demand is slightly below supply, it goes in the other direction.

"I don't know whether supply will cancel out the drop in demand, but there is certainly a drop in demand and a drop in supply," he said.

"As much as I don't like to talk the market down, I think it has a bit more to go yet."