Resilience in light of pressure

Most participants expected a weaker tone due to China's COVID situation and the ongoing Ukrainian invasion.

But, after an initial easing in the first hour of selling on day one, the market stabilised somewhat and managed to close out the week with only relatively minor losses.

The Australian Wool Exchange (AWEX) Eastern Market Indicator (EMI) closed 9 cents a kilogram lower in local currency terms, and only US5c/kg down - but was 19 Euro cents a kilogram lower.

This highlighted the effect currency markets are continuing to have on global buyers.

Superfine Merino continued to be the sought after segment of the market last week, with both fleece and skirtings measuring 17.5-micron and finer easily finding new homes.

Medium Merino types typified the market movement, with a 20c/kg fall on Tuesday followed by a similar sized gain on Wednesday. These then firmed up a touch on Thursday in the Melbourne-only sale.

Crossbred wools eased on the first selling day and tried to recover lost ground.

But these types failed to regain the previous week's level, and closed down 15c/kg for the week.

Carding wools fared similarly, with an overall loss for the week of about 10c/kg.

The outcome for the week was very similar to previous weeks, albeit with a slightly negative move overall.

But really the wool market is showing incredible resilience in light of mounting pressure.

To be sure, it has not reached extreme highs this season, and perhaps that is assisting with its ability to withstand growing pressure.

Some other commodities, such as cotton, have reached decade or more highs, and the volatility in the cotton market is now regularly pushing trading limits on the futures exchange.

Similarly, the oil market and, therefore, synthetic fibres such as polyester and nylon, are bouncing around in price.

Swings of 5-10 per cent are not uncommon across a week - depending on the headlines coming across the wire services.

Having a relatively settled, stable price regime is providing a degree of confidence to wool buyers and processors along the production pipeline, and allowing them to make longer term plans.

There is some price resistance at the superfine end.

But this is nowhere as prevalent or damaging as back in 2018, when everyone seemed to be complaining about the sudden price increase of wool.

The simple fact that superfine wool is still very cheap compared to cashmere, and arguably a much better fibre from a processing perspective, obviously helps.

So too does the multitude of new products being developed and sold using superfine Merino, many of which are less price sensitive than traditional suits and socks.

With an exceptional growing season in eastern and southern Australia, developing the outlook will be for increased production - but also a coarser wool clip.

This will limit the volumes of superfine wool available to the trade next season - something European buyers are already very conscious of, and are taking stock accordingly.

Medium Merino wools which fit the traditional specifications are also likely to be few and far between in the coming season as vegetable matter (VM) levels increase.

But volumes will also certainly be increased on the back of increased wool cut per head.

How prices fare for these wools will be driven to a large degree by Chinese domestic and uniform demand.

At present, uniform business in China has dropped off compared to previous seasons.

But that is one lever that the Chinese government can easily manipulate.

Another policy in China which is proving more problematic is that of COVID zero.

While the abandonment of the quest for zero is unpalatable from a political viewpoint, and from the ability of the health system to cope with a sustained outbreak, the economic and social cost of the policy is starting to increase.

Draconian measures are being imposed by local health officials, who are in some cases fearing for their jobs should an outbreak be attributed to their management.

And while the lockdowns thus far have been relatively short compared to the lockdown kings of Melbourne, nevertheless some of the citizens are beginning to complain.

Of far greater importance to the wool industry is the economic effect of the lockdowns.

Already hamstrung by slow sea freight to and from China, factories are now struggling to maintain any sort of production efficiency.

How much damage the situation inflicts on the upcoming GDP growth figures out of China will be watched with interest.

Some analysts suggest that anything below 5pc growth actually means the economy is going backwards.

So, if a zero number is achieved - as some predict - we could see a massive reaction from Beijing.

Other governments around the world have less direct control over their economies, or less levers to pull on, and signs of a slowdown in consumer activity are being seen from Europe to America - despite inflation pressures as a result of energy costs.

This presents a challenge for the wool market because consumer confidence drives discretionary purchasing, and the long lead time of a woollen garment has to be factored in.

The outlook from a consumer viewpoint, particularly in Europe, is pretty ordinary at present.

But so far the production chain is holding the faith and continuing to support the market.

Time will tell if this optimism is misguided or not.

But hopefully by the time September rolls around, and the bulk of the current production is on the shelves, a few spot fires around the globe will have been extinguished.

Another relatively big offering this week of 49,000 bales will test the market.

But the volume of Merino wool, especially fine and superfine, is reducing on a weekly basis, and April-May is a traditionally a weaker supply volume period - which may just hold things together.

- ELDERS WOOL