Wool market prepares to ride out the storm

Wool market prepares to ride out the storm


For most segments of the wool market, the final report was pretty grim reading.


Xi, we have been Trumped! An expected solid resumption to the wool sales after the three-week recess failed to materialise last week, with a fairly dramatic fall across the board and currency spectrum.

The single exception was the cardings market which managed to finish in positive territory.

For all other segments of the wool market the final report was pretty grim reading, with losses on the Micron Price Guides ranging from -60 cents in the superfine and crossbred ends to -180 cents in the Fremantle medium Merino indicators.

Overall the AWEX Eastern Market Indicator (EMI) eased by 78 cents, or 4.5 per cent.

In other currencies the numbers did not look much better, with 87 US cents and 72 euro cents being taken off the indicator, which was more or less 7pc.

Only the Chinese numbers fared better with a 4.7pc price adjustment despite a relatively dramatic devaluation of the Chinese yuan against the US dollar.

To say that the price movements surprised everyone is the classic understatement.

Most people in the trade up until late the previous week, expected the usual solid start as mills needed to restock following the recess, as greasy wool stocks in front of machines remain perilously low.

The wool market has been resisting the trend of other fibres, and other commodities for a few months now, as pockets of demand and the constant supply issues prevented a downturn.

However, with the industry walking alone on the tightrope and the importance of Chinese confidence, the wool market was finally given a reality check.

Just when it seemed that trade negotiations were progressing, the US President deemed that progress was stalling and so imposed extra tariffs to cover all remaining goods imported from China.

The world's economy was spooked by this move, and China's response to allow its currency to devalue added significant fuel to the fire.

As the yuan breached the psychological 7.00 barrier, a shudder went through global equity and commodity markets as the ramifications of the increased angst in the trade war painted a gloomy picture.

At the same time various Reserve Banks have been easing monetary policies in an attempt to stave off recession - not quick enough by the US Fed Reserve according to Mr Trump, but the Kiwis surprised everyone with a 50-basis point cut, which walloped the Australian currency during the week as well.

With consumer confidence dented around the world, and none more so than in China the signals feeding into the wool market were not good.

Often in the past the wool market has taken a major directional shift in response to a significant global event - Asian Financial Crisis, the SARS epidemic, GFC etc, and usually this movement has been down.

Whether the trade war has now become a significant event or not, or if it can be retrieved is still yet to be determined, and the difficulty is not knowing.

For mills and processors, particularly in China, they are wondering if the situation will get worse or not, so rather than buy wool, they simply chose to sit out.

The market ramifications were obviously quite extreme, given the volume of wool China normally buys, as is often the case when the reverse occurs and they need to buy larger quantities.

Greasy wool stocks are very low in China, but the risk of purchasing more wool at present, with the cloud of uncertainty hanging over them forced the major operators to sit on the sidelines and wait.

There may be an equally sudden change of fortunes next week, however, with Fremantle quotes finishing lower than those of the east coast, it is likely that there is still a bit more downside in this story.

The big challenge is obviously achieving a win-win scenario from the trade talks, with China simply not prepared to accept a resolution which will see them lose face, and with President Trump's upcoming election cycle and his considerable ego also demanding a 'positive' outcome from the negotiations.

Unfortunately, the impasse is now drawing in many other countries and economies, rather than just the original protagonists, and the wool industry with its reliance on China has been caught up as collateral damage.

There have been some positive developments late last week with China fixing its currency midpoint above the dreaded 7.00 figure, which has calmed the nerves of many markets.

Nobody outside of China and the US believes that either side can carry this on for too much longer, although both sides publicly state that they can.

The election pressure, and at some point economic pressure, will become too much for the American side, and the Chinese stance is being eroded with every new stimulus measure they are forced to roll out.

So, for the wool market it is a matter of battening down the hatches and riding out the storm.

The fundamentals of the underlying market have not changed, and merino wool remains one of the most marketable fibres in the world.

It ticks all the boxes which are important to today's consumer around sustainability and environmental responsibility as well as high performance and luxury.

Yes, we have had some price resistance, but that has well and truly been addressed at present, and it is simply a matter of consumers regaining enough confidence to feel comfortable making a purchasing decision.

The turnaround in fortunes will be significant and memorable when it does happen, because as we know the wool market is nothing if not volatile.


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