Wool industry's world domination comes with frightening trade risks

A key investigation even suggests several overseas countries as possible locations for an "Australian" processing works.

A report released today again highlights the dangers of relying almost totally on one overseas destination for wool processing, especially given the danger of an animal disease outbreak.

The Deloitte Access Economics report, overseen by Wool Producers Australia with $662,000 from the federal government, says there is still a chance a major scouring and top-making plant could be afforded here.

That report now gives the wool industry hope of fine-tuning the investigation to get their plans off the ground.

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This is despite the high cost of building a processing works, estimated to cost more than a $100 million.

That plant would perform "early-stage processing of 170 million kilograms of Australian wool" or about half the current volume of exports.

WoolProducers chief executive officer Jo Hall said during recent years WoolProducers have become increasingly concerned about the material impact that trade disruptions could have on the wool market.

"These disruptions can occur though freight and logistics issues or through the imposition of tariff and non-tariff barriers," Ms Hall said.

"The report has shown that onshoring early-stage processing to Australia is a genuine proposition for the global wool industry into the future.

"Given the significant impact that some of the modelled trade disruptions could have on both the wool industry and the broader Australian economy, it's certainly worth a further look."

The report says Australian labour costs remain high internationally but could be balanced by cheaper transport costs.

MORE READING: Blackall has already put up its hand to process wool.

Nevertheless, the wool industry was encouraged to look abroad for its processing works - key targets already identified include Bangladesh, India, Indonesia and Vietnam.

Today the Australian wool industry exports most of its raw product to China.

"Market concentration exposes the industry to significant risks from animal disease events, trade disruptions and geopolitical tensions," the report says.

It was calculated a foot and mouth disease outbreak could cost the wool industry more than a $1 billion "for each year affected".

"Detailed modelling shows that Australia could deliver processed wool, particularly scoured wool, at internationally competitive rates when comparing operating costs.

"However, the capital investment required is significant with payback periods likely to be commercially unappealing."

The wool industry is one of Australian agriculture's most exposed sectors due to its heavy reliance on a small number of early-stage processing destinations.

The world's biggest supplier of wool with 39 per cent of all global wool exports worth almost $3 billion fears it has all its eggs in the one basket.

Less than five per cent of wool grown in Australia is now processed here.

In the 1990s, half of the Australian wool clip was cleaned domestically, and half was exported unprocessed. The domestic wool processing industry relied on significant government subsidies.

China's market share of Australian wool exports rose from just 4.2 per cent in 1990 to more than 90 per cent in 2021.

In recent years, the industry watched in horror as political unrest led China to retaliate with trade restrictions.

Border closures during the COVID-10 pandemic also caused a trade shock.

MORE READING: Govt targets overseas firms for new tax grab.

Now it is FMD in Indonesia which is causing the most alarm.

Wool growers take some comfort in knowing China's big textile industry needs Australian wool as much as our industry needs them.

Almost all China's greasy wool imports come from Australia (75-80pc) - the next biggest source countries are New Zealand (7.5pc) and South Africa (7.2pc).

But even a change in government has not allayed fears.

It has been calculated any Chinese boycott of Australian wool would have an impact like the catastrophic move to to abandon the Wool Reserve Price Scheme in 1991.

When that happened, wool prices dropped from 700 cents per kilogram to 450 cents virtually overnight.

Australia used to be home to hundreds of spinning mills, in a time when scouring was done locally.

But cheap imports from places like China, India and Turkey put almost all Aussie mills out of action.

It has already been identified the "current choke point" in the long wool supply chain is at the early-stage including scouring (washing), carbonising and top making.

WPA engaged Deloitte to "consider all aspects of future opportunities for early-stage wool processing in Australia".

MORE READING: Lamb prices fall from grace in the US.

The research seeks to wants to "reduce the current risks faced by the Australian wool industry through its current reliance on a limited number of export markets".

Other than cocooning the industry from international trade harm, a domestic industry would also create a new industry and many jobs here, the report found.

Expanding early-stage processing capacity in Australia to process 170 million kilograms a year could add up to $1.3 billion to wool industry output and $1.8 billion for Australia each year, it says.

The report recommends more reports.

"Critical knowledge gaps still exist on the priority countries identified and global wool textile and clothing industry dynamics, with a particular emphasis on industry relocation and structure.

"More work is required in these areas as this will influence the markets to be targeted. This report recommends the undertaking of two separate business cases to provide an evidence base to consider potential government intervention, based on an assessment of the likelihood of risks, and the economic and social benefits that may result."

The final report is available on the WoolProducers website or can be accessed here.