Wool market reacts to coronavirus outbreak

Wool market reacts to coronavirus outbreak

Coronavirus
Overall at the end of the week the market indicator was about 30 cents a kilogram cheaper.

Overall at the end of the week the market indicator was about 30 cents a kilogram cheaper.

Aa

Overall at the end of the week the market indicator was about 30 cents a kilogram cheaper.

Aa

"China sneezes, and Australia catches the flu".

This strong China-dependence of Australia and the wool market was highlighted last week with the wool market undergoing a swift and violent reaction to the coronavirus outbreak in China.

Then, as calm was restored and people looked a bit further ahead than the current daily issues and their social media screens, the market recovered almost all of the losses.

Overall at the end of the week the market indicator was about 30 cents a kilogram cheaper, but the bulk categories of Merino fleece in the 19 to 21-micron range finished more or less unchanged.

Crossbred wools, which continue to make up a larger proportion of the offering each week, eased by 30-40c/kg, but cardings continued to show resilience in the face of adversity and closed in positive territory in two out of three centres.

European activity increased as it usually does when Chinese National Holidays slow the Chinese buying activity, and the European fraternity also ratcheted up activity another notch in response to delayed shipment notices from some Chinese mills.

Growers across the country again voted with their feet and passed-in or withdrew more than 30 per cent of the offering, which was a large factor in the price recovery later in the week.

Buyers were struggling to fill the orders they had in hand after wools had been withdrawn, and in some cases had to go to the offer board and buy wools from there.

Once the hysteria had died down, and people had a more realistic think about how things will probably pan out, orders started drifting back into the market.

Futures began trading again on the Riemann market and buyers looked at the forward offerings with a touch of concern about supply again.

The volume of wool which has been passed-in recently will allay the supply shortage in the short term, however there is still expected to be a shortfall in the back half of this season courtesy of the drought.

Until now the Merino fleece market has been range-trading since last October and from a technical perspective we are still within that range, albeit at the lower end of it.

Support around current levels should see this range confirmed, and as more information becomes available about the manufacturing activity in the short term, most expect the market to continue to firm.

Most factories in China have been ordered to remain closed for another week to reduce the movement of people.

So, Chinese citizens get an extended New Year Holiday, and no doubt the Chinese economy will take a temporary hit, but in a great many cases production can be ramped up to cover this shortfall as soon as workers return to the coalface, by either working extended hours or switching on previously mothballed capacity.

Markets in all sorts of commodities are trying to map out potential paths and consequences of the outbreak.

Comparisons to the SARS outbreak in 2003 and MERS in 2014 provide something to go on, however the growth in social media and the 24-hour news appetite is pushing the boundaries.

Now that the World Health Organisation has stepped in and declared this outbreak a global emergency, everybody will be offering an opinion.

It is obviously not the mortality rate which will have an impact on the wool market, but the measures to limit the spread of the virus, which could restrain trade and product movements.

As Holger Schmieding, chief economist at Berenberg bank wisely pointed out, economists are not qualified to judge how dangerous the spread of the virus may eventually be.

That does not stop media outlets from asking the question, nor for many providing their opinion, unfortunately adding to the misinformation soup bubbling away in cyber-land.

As Paul Donovan, chief economist at UBS Asset Management, put it: "The rise of fake news over social media means fear can spread globally more quickly. It is fear of disease, not disease itself, that has the biggest economic repercussions."

Hopefully health authorities can take control of the narrative and put in place measures which are considered, necessary, but not overly restrictive and within a couple of months everything can get back on track.

The SARS pandemic in 2003 caused a temporary dip in Chinese GDP growth.

The main impacts stemmed from falls in retail sales and travel as people sought to avoid crowds through fear of contagion.

Nowadays the Chinese economy is bigger, as a proportion of the world's economy so the impact could be more widely felt but also the online retail activity, a huge percentage of Chinese retail compared to other countries, is unlikely to diminish, and could even increase with people stuck at home for an extra week.

The Chinese government in 2020 now has a much larger degree of control of information and can quickly inform the population of measures it has taken, and what the situation really is.

Already in global equities markets we are seeing things return to 'normal' after the initial sell-off.

The flight to safety in the currency markets has seen both the Aussie and Kiwi dollars sold off to near 10-year lows, but exporters will welcome the relief that this brings.

Shortly some enterprising online retailer will recruit a suitable influencer to promote the "scientific discovery" that woollen masks are far more effective than the commonly worn single use surgical masks.

In the meantime, the general population will come to the realisation that in order to stay healthy they should be wearing only natural fibres, sleeping under only natural fibres and walking on only natural fibres.

Aa

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