Low wool price ratios to other fibres may spur buyer interest in continuing flat market

Bargains in the bin may bring buyers out

Wool
Wool is being held on-farm and in broker's stores as growers balk at the flat market - but processors could soon be enticed by low ratios of wool prices to those of competitive fibres.

Wool is being held on-farm and in broker's stores as growers balk at the flat market - but processors could soon be enticed by low ratios of wool prices to those of competitive fibres.

Aa

Growers holding on, but low wool prices relative to other fibres may start to spark some buyer interest.

Aa

As anticipated, the wool market struggled again last week and prices dropped by 37 cents a kilogram - or 5.5 per cent - in US Dollar terms.

A weaker US Dollar continued to make life difficult for growers and exporters as the Australian Dollar briefly cracked the US0.74 cents level during the week.

Understandably, 20 per cent of the offering was passed in - with many growers unwilling to accept these prices.

While some are obviously circumspect about the market and thinking that cash is better than running the risk of the market falling further, others are not buying into this illogical soft market and choosing to withdraw and hold.

Despite the amount of wool being withheld - either on-farm or in broker's stores - and very lacklustre demand, the market has actually cleared 12,000 more bales during the first seven weeks of the new selling season than at the same time last year.

Obviously, this creates part of the problem, with supply in the market overwhelming demand and thus pushing prices further down.

But it also means that this wool is not adding to the grower stockpile, which is building-up across Australia.

Overseas mills are quietly voicing concerns about stockpile levels.

But it would seem unlikely that much of this wool 'on hold' will suddenly be pushed into auction at the first sign of a price turn-around.

More likely, it will act as a buffer if the market does really shoot upwards. Alternatively, it may be held for many months - if not a year or more.

Storage charges will obviously mount-up over time.

But for a commodity that has fallen more than 50 per cent this year - and much more than the competing fibres - upside potential in the medium term must be getting stronger purely on a cyclical basis.

Many of Australia's exporters, as well as trading companies in China, are becoming increasingly wary of this 'snap-back' effect as the proverbial elastic band gets pulled tighter and tighter.

Late last week, after the sale of a couple of boxes into the Chinese market, the asking price for wool quickly moved higher as the trade remained wary about being caught out.

This week there is a small offering of only 23,000 bales across the nation.

So it would be fairly easy for a buyer to be left scrambling to fill a container of a specific micron, especially if the specifications around yield and strength are tight.

Why wool has fallen further than other apparel fibres during the COVID-19 pandemic remains a bit of a mystery - and something which is being discussed at length.

Certainly, the traditional volatility of the wool market is once again coming to the fore - hence the wariness of traders and processors as they contemplate a recovery in prices.

The concentration of early stage processing in China, or having 'all of the eggs in one basket' is also being talked about.

But it is probably more an issue of over-capacity, rather than one country in the very small interconnected world in which we operate.

There are basically the same number of wool combing machines in operation today as there were back in the 1990's, when the wool clip was three times bigger.

So the fact we are now seeing some of those mills close down, probably permanently, does not surprise us.

For the past 30 years, these have largely survived on government assistance and economic development momentum - while cannibalising each other.

Those early stage processors that are strong - and smart - enough to weather the current storm may well find a much better business environment 'out the other side'.

Price comparisons with cotton and polyester show that wool, both Merino and crossbred, are back to historically low ratios.

Typically, at this point in the cycle, the industry swings back to using more wool in suiting blends and less polyester - leading to an increase in demand for wool.

Even though wool is relatively cheap compared to the past five or 10 years, this increase in blend composition - and therefore demand - is slow due to the overall COVID-19 situation - as well as the demise of the traditional suit market.

The number of new suits, particularly in menswear, being sold now compared to 20 years ago has fundamentally changed.

How adaptive the processing industry at large has been is questionable.

The growth of active and casual wear has been remarkable over the past 10 years and this segment has been the first to shrug-off the effects of COVID-19.

But the sheer number of processors still pursuing the traditional suiting market is a drag on the industry.

A business tailored to producing cheap business suits for the millennials, who don't like to wear them, or the contracting uniform market is going to struggle.

It is a very large historical part of the wool industry and a very large ship to turn around, but it is possible.

During tough times, smart people innovate, and there will be a plethora of new winners emerging from this crisis in the years ahead.

Already at the 'top of the tree', the luxury brands are getting back on board and starting to purchase for next year.

Their customers are either over - or not into - fast fashion and unsustainable textiles.

Merino is perhaps the 'new' post-COVID-19 product that the innovators will grab hold of.

Unfortunately, the term 'wool' has a lot of baggage, and for many it is an easy re-invigoration to switch across to 'Merino' instead.

That does bring with it many challenges in terms of quality, traceability and credibility - not only for the Australian wool grower, but also for processors globally. But these are certainly achievable, as many have already shown.

Preparing for the re-emergence of consumers post-pandemic is underway.

European processors have returned from their summer holidays and are cautiously reopening dialogue with the supply chain.

There is a lot of shock at current price levels.

But those who have been around for a while have seen it before, and know that there will be a rebound - and that today's price levels does represent a good buying opportunity.

While it is too early to call a recovery, this week should bring about slightly better greasy Merino prices.

Aa

From the front page

Sponsored by