Wool market like a big casino

Prices shot up at national auctions last week, before stalling at the final stage and dropping significantly during the second day of selling at Fremantle.

And more fireworks are predicted when selling starts again this week.

Even though the demand signals have not been inspiring in 2021, the desire of the early stage processors to ensure they have enough stock to resume operations after their annual shut-downs - and the trading fraternity being determined not to be left out - have combined to provide a very nice increase to wool prices for the start of the new year.

It started with superfine Merino wool - and really only in that category.

But last week, the price pressure spread to medium Merino types, which had gains of about $1 per kilogram.

Crossbred wools also received a long-awaited boost as topmakers and traders searched for value, and these categories increased by 50-70c/kg for the week.

Cardings continued their trend from last week and jumped another 50c/kg as well.

Overall, the market closed up US50c/kg and up 89c/kg in the local currency.

It is not just the Australian market that is being affected by what some traders have called "China Madness", with strong inquiry for the available Argentinian wools that are available for export.

There is also strong demand in the South African wool market, which shot ahead of everyone - with the 10 per cent price increase in the Cape dwarfing the 6 per cent rise experienced in Australia.

Why the premium to Australian wool is increasing in the Cape has some people in the trade perplexed.

But the combination of European processors shopping there - strongly - to take advantage of the shipping and duty arrangements, together with the larger percentage of accredited wools showing a premium to "normal wools" - and the yet-to-be-determined Chinese government rebate for importing South African wools - all add up to the South African market getting a fair bit of attention from processors across the globe.

But volume seems to be the number one factor, as mills stock-up in anticipation of a better selling environment in March-April - and the Australian market is still the only place in the world to accumulate big volumes of good quality apparel Merino wool.

With a lot of turmoil around the world, including the day traders "ganging up" on the hedge funds who like to short a company under pressure - and perhaps hasten its demise, thus profiting from the outcome - the wool market is perhaps getting ahead of itself.

Or, perhaps it is building a base from which to launch the next super-cycle.

Demand for woollen garments - always the key long-term driver in any upwards trend for price - is yet to emerge.

The exception is superfine knitwear, which has been selling well in the chilly Chinese winter and is expected to continue to provide support for this category - which is also seeing (coincidentally) a considerable drop in supply.

But the basis between superfine and medium Merino is being stretched to extreme levels.

This is starting to cause quality issues further down the production pipeline as poorer quality, cheaper substitute wools find their way into some blends.

Medium Merino wool does not currently have a solid or increasing demand signal to boast about.

The ravages of the COVID-19 pandemic are still playing out and have transformed, perhaps permanently, the consumer wardrobe.

There is still a veritable mountain of suiting fabric lying about in warehouses waiting for people to return to offices.

No doubt some of the Wall Street traders will not be buying a new suit this month, given the shellacking their bonus pools have taken thanks to the Reddit warriors.

The long-awaited Chinese Army uniform order, for which much wool had already been purchased, has been further delayed as the government there holds off on approvals.

No doubt it will be forthcoming, but the composition - in terms of micron - and number of uniforms is unknown, so preparations have ground to a halt.

Most mills in China are in the process of closing down now for the annual Chinese New Year break, although not all.

The Chinese government is desperate to avoid an outbreak of COVID-19.

It has reportedly been encouraging some companies to keep working and has provided a bonus of RMB2000 - or $400 - for employees to remain at their workplace, rather than travel home to see family and friends as per the typical tradition.

This is unlikely to have a big impact, according to anecdotal reports, and many mills are now closing for two to three weeks - and will only slowly wind-up again towards the end of February.

So, the greasy wools purchased in the past couple of weeks will be on the way to China now and arrive when production restarts.

This means the auction scene for the next three weeks in Australia and the Cape will be interesting.

Trading companies and mills who have purchased stock recently do not want to see the market crash and their stocks lose value.

But to continue to buy more to add to an existing stock position requires very deep pockets.

The closing quotes at auction in Fremantle last week were down 30-80c/kg compared to the eastern auction selling centres, so that is a likely target for medium Merino types.

Then, at some point, the speculators will dive in and start taking stock again.

One Chinese mill owner remarked last week that the current wool market was "like a big casino", highlighting the gamble required to operate in this industry at present.

For Australian woolgrowers, the decision about selling wool is relatively easy to manage and insignificant compared to other major farming decisions where Mother Nature is involved.

But deciding what to offer, with what price reserve, in a designated sale week does consume a lot of discussion time for some with their advisers.

Other growers, knowing that their risk is protected and there are other sale options available at a moment's notice - and perhaps with an eye on the growing evidence of a global commodity upswing - just let the dice roll. They are concentrating on growing next year's clip.