Wool Report: ticking over as we wait for trigger

THE Australian wool market held up very well last week in the face of a larger than expected volume, a slightly less favourable currency conversion rate, the circus of Washington and the number one customer all but shut down for holidays.

The AWEX EMI finished the week 4 cents lower in local currency terms. 

A weaker US Dollar saw prices in that currency rise by 6 cents and the Europeans ended up paying 3 euro cents less than they did the week before, and the Chinese domestic users saw a minute increase in yuan prices if they bothered to check. 

Most did not as they were already on trains, buses and planes heading to their home town for the Chinese New Year celebrations.

Some Chinese buyers have been agitating for a recess in the auction calendar to accommodate the Chinese New Year period, but coming so soon after the Christmas recess it would unnecessarily increase stocks in the system, and most companies are able to accommodate CNY quite easily with the communication devices available these days. 

So the one large top making mill which has chosen to sit out next week may well find that their competitors get a free kick at their expense next week. 

The auction system will pause on Wednesday, selling Tuesday and Thursday instead to facilitate those Chinese buyers who party too hard on New Years Eve. 

The balanced market at present in terms of supply and demand is nice, but frustratingly marooned around current levels. 

This week’s result showed the resilience of the market, and growers willingness to support it by passing in wools if prices faltered at all, but the trigger to kick start the next upcycle remains just out of reach. 

Everyone up and down the supply chain understands it will come, and the historical data tells us that it is well overdue. 

Buyers are trading cautiously at present, wary that selling too much could leave them over sold and vulnerable, but also not yet confident enough to build a large amount of stock and wait for the upside. 

Good prices are still being paid for slightly higher VM, or other characteristics which are slightly outside of the generic contract types. 

When the market is troubled discounts for these ‘fringe’ types increase but at present buyers are willing to be a little creative or adventurous and only those really poor quality lots are receiving a sizeable discount. 

So this week’s sale volume of less than 35,000 bales was expected to spark an increase in price again given normal supply and demand economics. 

Unfortunately, the wool market is waiting for that demand signal and can withstand the ebb and flow of supply changes. 

Demand signals will firstly come from China and secondly from Europe, both of which are in the economic doldrums. 

No doubt the Chinese government boffins were carefully watching the developments in Washington DC and preparing to respond. 

After no outlandish policy announcements around global or Chinese-specific tariffs they are probably wondering what to do now as all the pre-inaugurations hype had led us to believe free trade as we know it was under serious threat. 

There will no doubt be some negotiations in coming months about how to balance the trade deficit which exists but the ball is now in China’s court to explain to their citizens how Beijing will actually improve their own domestic economy, now that the Trump threat has at least temporarily eased.

No doubt many stimulus plans have already been developed, but aside from a mooted catch up in government department uniforms there has been nothing announced yet. 

The annual GDP growth figure for 2024 was released last week, and as expected perfectly matched the government target of 5 per cent. 

Not many believe the true figure was this high, but Beijing will certainly be pulling a few levers to make sure that this year again reaches within rounding distance of their soon to be announced 2025 target. 

Whether these levers actually work and improve economic activity and consumer sentiment is still to be answered, but like all politicians those in Beijing historically like to send out good news stories at festive times of the year to bask in the reflective glow. 

Europe on the other hand is struggling to find a suitable lever to grasp and aside from interest rate cuts nobody is promoting any great plans for change to get the two large economies of Germany and France moving again. 

Both are mired in political uncertainty and stagnation with elections coming shortly in Germany and France seemingly bereft of a path forward. 

Perhaps if Mr Putin takes the opportunity of a new American administration to actually negotiate a face-saving resolution to his “special military operation” it will be enough to inspire a bit more confidence in the European consumer. 

A bit of cold weather would cer tainly be beneficial for wool consumption. 

So, the wool market is holding very well, but frustration at the lack of improvement in demand is ongoing. 

A bit like the weather, lots of talk about it, but not much we can actually do to change it on an individual basis, but we can be prepared for when it does happen.