Wool market gets off lightly

A somewhat tumultuous week on global markets saw the wool market hit with what was in effect a moderate correction.  Many other commodities and equities were smashed, so the wool market has got off pretty lightly by comparison and the sizeable fall in the value of the Aussie Dollar shielded Australian wool growers from the worst of it.  The AUD has appreciated considerably since the wool auction selling days but global markets are by no means settled yet, so the outlook in local prices for next week is a toss of the coin at best.

In local currency terms the AWEX EMI rose by 13 cents, but in USD in which most wool is traded the market was down by 34 cents.  In Euro terms the price of wool was 47 cents cheaper and for Chinese buyers concentrating on the domestic market their wool purchases were 1.8 RMB/kg cheaper.  If buyers covered the currency for their purchases on the day as most do, the prices are locked in, but since auctions closed the turmoil has continued and currency markets have basically dumped the USD, bought back into “risky currencies” such as the Aussie, and then fled further into other safe haven currencies such as the Euro or Swiss Franc, so valuations or bidding limits for next week are extremely fluid at the moment.

The fundamentals of the wool market continue to favour the better tested medium merino wools where the supply shortage is most keenly felt and demand is most apparent, even if it is just pipeline filling.  Blends of 19.5 to 21.0-micron with cotton are driving a lot of the production at present as knitwear continues to be the apparel garment of choice. Superfine merino prices rose marginally in Aussie Dollar terms this week but were obviously cheaper in USD.  The better tested lots are still finding favour with the processing trade but there are simply too many poorer quality wools in the mix to get the market excited.  Next to skin active wear, cashmere substitutes and blends with silk and the like are all going okay, but there is not enough demand yet to exceed the supply available hence the relatively poor prices.

Crossbred wools held their ground more or less, although across the ditch in New Zealand the market was pretty ordinary.  Consumers have been more enthusiastic when it comes to buying woollen quilts, bedding and carpets given the low price point of crossbred wool over the past couple of years and it has certainly been easier to move a natural product when it is cheaper than the synthetic alternative.  But like all these price cycles demand improves when the price is low, but when the price inevitably begins to move back to a more sustainable level for the wool producer retailers start to complain.  As with every other micron category a lift in consumer confidence is required to push the price point higher and allow greasy wool prices to lift considerably and keep producers in the business.

To say that consumer confidence has taken a bit of a hit this week is probably an understatement, but nobody really knows how things will pan out at this stage, so the general consensus in the processing trade is that if you can still sell, keep buying and shipping.  Many things could change, but at this stage nobody knows what will happen tomorrow let alone next week or next month.  For the wool industry the American consumer market is not the dominant market, but it has been a shining light over the past couple of years given their resilient economy compared to that of Europe and also the Chinese domestic market.  There are currently some anecdotal reports of panic buying in anticipation of the implementation of tariffs so to date American retail is still doing well – what happens from next month onwards is very much up in the air. 

The shifting of supply chains away from China, at least in latter stages of production has been in full swing since Covid and now that countries such as Vietnam and Cambodia have been granted a 90-day reprieve from their large tariffs we can expect that those factories will be going hell-for-leather with production.  At the end of the day this trade war is all about Sino-US relations with the rest of the world just being collateral damage. Trying to forecast the future and predict where we will end up is fairly futile at present with daily changes being made in Washington and consequent market gyrations.  The larger early-stage processing mills in China have actually had a reasonable week selling product to Europe and other parts of Asia so their buying next week will be basically unchanged, although currency dependant. Smaller mills in China who rely largely on commission orders are having to wind back production and so some smaller orders will disappear from the market next week. 

How much stimulus the Chinese government injects into their domestic economy will be important for the textile industry over there as mills continue to press ahead with production of greige yarn and fabric hoping that the retail orders will flow. The Chinese consumer is certainly very worried at present how this trade war with America will affect them and they will be reticent to spend any money unless the government can show them that a positive outcome is possible.  Saving face becomes a huge issue for all parties, but that seems a long way off at present.  Again using the futures market to remove some of the risk for the spring would seem to be the most prudent move while we wait for further developments.  Interesting times indeed and all we can do is sit on the sidelines and watch to see what unfolds.