Supply starting to contract

The Australian Dollar had finished the previous wool selling week at US0.7315 and closed at the end of last week's auctions just shy of US0.7500, which ultimately had an effect on local wool prices.

When all things are moving well and demand is solid, the wool market can shrug off such currency movements and increase Australian Dollar prices.

But at present demand is faltering somewhat.

So, the currency adjustment was clearly applied across the spectrum and the entire wool market was cheaper.

In US Dollar terms, wool prices were more or less unchanged - with just a few minor increases at the superfine Merino end.

The overall Australian Wool Exchange (AWEX) Eastern Market Indicator (EMI) closed four cents per kilogram higher in US Dollar terms.

In Euro terms, the movement was similar as Europe avoided the currency fluctuations for a change and saw prices rise by just 7c/kg Euro from the previous week.

As mentioned, superfine Merino types - in both fleece and skirtings - are still well sought after as buyers continue to look ahead to what will surely be a lower supply of these wools next season - provided the current favourable growing conditions continue.

Vegetable matter, cot and colour are increasing in the "bread and butter" Merino wools, and in the crossbred clips, providing buyers with more work to do at the sample box - but also providing more reason to apply discounts compared to those well grown, well prepared clips.

Crossbred wools are just holding sway at present as buyers hesitate about where to best invest their limited buying resources.

Similarly, across the ditch in New Zealand, the market struggled to maintain any momentum and fell another 3-5 per cent last week.

Some of the topmakers took their foot off the pedal slightly last week, while others pushed forwards strongly.

Export traders managed to balance their funding limits to purchase 45,000 bales across the week - just.

There is certainly a lot more effort going into checking balances and allocating requirements before and after each auction day than previously, when funds were seemingly unlimited.

Banks, to date, have been very accommodating.

But there would be a lot of time spent reassuring these lenders that everything is still going okay and no major catastrophe is imminent.

Of course, something may happen, but it will only be with hindsight that anyone will be able to point it out.

The wool market is entering a very interesting phase.

Supply globally is beginning to contract, with the "big" sales in Australia now behind us, and generally 45,000 bales - or less - will be the typical roster going forward.

Across the Indian Ocean, the Cape is also beginning to wind down - with only 6000 bales on offer this week.

And apart from the withheld catalogue from a couple of months ago, its sales will presumably move to a fortnightly basis after Easter as usual.

South America is basically done and dusted, with local processors having secured the remaining crumbs to keep their machines running over the winter.

In Europe, it is still too early in the season to find fresh supplies of wool - greasy or scoured - as Russian mills are finding out as they search for something to process now that imports are largely cut off.

At the same time, demand in Europe, India and non-China Asia is okay, but would be expected to be winding down soon.

Certainly, with most mills in China now offering May shipment, the season for spinning and knitting is coming to a close.

In China - in a normal year - mills would be gearing-up to produce their domestic production for collections which will also hit the shelves in September.

Quite often in the past few years, we have seen this Chinese demand ramp-up after Easter, just when the supply in Australia begins to tighten - resulting in a squeeze and consequent boost in prices.

This year, however, thanks to a pesky little virus which is still persisting around the world, we are unlikely to see a burst of Chinese demand.

At this point, early stage mills in China are still operating at nearly 100pc capacity.

But the pipeline is becoming blocked.

This is not because of a lack of demand, but purely due to COVID-induced logistic problems.

As the Chinese government maintains its quest for zero COVID, its testing and lockdown procedures are creating havoc with transportation.

So far, the mills are able to continue to operate - although a positive test is just a swab away and, after which, a 14-day lowdown will immediately be applied.

But moving goods from one factory to another is becoming impossible with the quarantine procedures being applied.

Truck drivers are sealed inside their cabins with a health department seal applied to doors and windows, and the drivers requested to stay inside until they return to their home base.

Then a 48-hour quarantine period may also be imposed if they have travelled outside their local area as defined by the health authorities.

Long distance driving is virtually impossible.

But even the relatively short distance from the Zhangjiagang Free Trade Zone to a port in Shanghai for export - a journey of three to four hours - is a logistical nightmare, as the route crosses more than one provincial border.

If the government is able to get on top of Omicron (and stay there), factories may be able to continue.

But if a more draconian set of lock-down rules are imposed, production - and the flow of goods - will be interrupted.

How long that is, and when it occurs may create a ripple effect back along the greasy wool pipeline.

But, then again, the wool industry may just be able to soldier on.