Plummeting wool market defies logic

AWEX noted that this was the largest single day drop since 2008, and this current market is definitely looking like a post Global Financial Crisis hysteria-based market.

Overall the drop for the week was just shy of 10pc with a 9.7pc reduction for the EMI.

The wool market has dropped more than share markets around the globe, but the reaction of some was similar to the panic selling of equities which took place last week after the yield curve for US bonds inverted.

In what the Governor of our Reserve Bank said is a poor indicator of a recession, the inversion of the bond curve sent the lemmings over the cliff as markets around the globe crashed.

The wool market seems to be in a similar jittery phase at present, with most people agreeing it defies logic and it has been way overdone.

Nevertheless, the prices received across the board were a lot lower than the previous week, with only selected types arousing the interest of buyers, and most Merino fleece being sold 150-200c/kg lower.

Crossbreds, in percentage terms, had a shocker with more than 15pc coming off their values.

The cardings market, which had been positive the previous week also succumbed and lost 30-40c/kg.

Less than half of the original rostered quantity was eventually sold as growers unsurprisingly withdrew their clips or passed wool in.

At 1700c/kg for 21-micron it is still a profitable exercise, and no doubt many have feed bills to pay, but for those with adequate resources there may well be a better selling opportunity further down the track.

The correction in the wool market, which started as a correction back in September 2018, and was probably artificially stifled by the low supply situation, has turned into somewhat of a rout, but is actually very similar to previous corrections when viewed analytically - perhaps a difficult task for those actually operating as buyers or sellers over the past couple of weeks.

As Chris Wilcox reported in the National Council of Wool Selling Brokers of Australia (NCWSBA) newsletter last week, the end of previous super-cycles in the wool industry have generally occurred when wool prices have been triggered by an event outside of the industry, but come at a time when the wool market has been ripe for a major correction - as in wool prices continuing to rise when other fibres are going down.

This current decline (28pc) since the peak in August 2018 is actually shorter (52 weeks) and less in percentage terms than previous corrections.

The most recent decline, and therefore the most likely to be repeated or matched, ran for 57 weeks and saw an overall decline from peak to trough of 35pc.

Excess cotton stocks in China, as well as a build-up of stock in the textile pipeline were slated as the trigger for that previous cyclical correction, according to Chris Wilcox.

This time with the Sino-US trade war and other global economic and political tensions all conspiring to pop the balloon, we may have a couple of weeks to run and perhaps a little bit more downside.

At the end of it, the price will still be higher than when the super-cycle began, and the low point higher than the previous low point.

So, from that purely analytical viewpoint we are probably nearly there, and the glimmer of light at the end of the tunnel is in fact not a freight train.

For many inside the industry dealing with the dramatic price drop over the past two weeks, it is a very challenging time.

The market seems to be defying logic according to some, for others it represents a good opportunity to buy and average down the price of their stock - some of which is now $5 a kilogram above market.

Processors and traders still waiting for their goods to arrive from South Africa would be looking at an even higher figure, plus the financing costs over the last six months - which is why buyers in the Cape have again cancelled the sale over there.

Hopefully the South African government can extract the proverbial digit, and get Cape wools moving quickly before they destroy a valuable agricultural industry.

Once the wool market turns, there will be a flurry of activity as buyers and processors in China do an about-face and scramble to buy what they see as cheap wool.

Looking at the volumes available around Australia, possibly no Cape wool, and certainly very little Argentinean wools (as growers there will not be encouraged to sell, with their 25pc inflation and uncertain political outcome at the low point of the market, when they can just keep wool on farm as a tax free, inflation free savings plan) the recovery could be equally as brutal as the past couple of weeks have been on the way down.

Unfortunately, in such a volatile market someone is wearing the pain, or compensating their clients in order to maintain relationships and contractual obligations.

All we need is the trigger to regain some confidence among the Chinese buying fraternity.

The Italian customers, many of whom are currently residing on the shores of the Mediterranean, are not sitting on their hands with regards to the wool market.

Perhaps having a longer history in the wool industry, and having seen many super-cycles come and go, they are more astute, or perhaps producing the articles that are more resilient in terms of demand - or perhaps the Italian economy is doing better than everybody thinks.

Combined, the main Italian operators purchased nearly 15pc of the offering last week with a few other downstream sales also made to Italian interests.

If the Chinese mills follow the lead of the Italian operators we may see a recovery quickly, but if they choose to wait for signs of resolution in the trade war, it may take a little longer.