Wool market takes reality check

THE AWEX EMI showed a decline of 10 cents in local currency terms, and a 5 cent drop in USD terms.  

The weaker Euro currency meant that wool prices there actually went up a couple of cents, and the movement in Chinese currency was pretty muted as well with prices down by a couple of jiao.  

So after six weeks of positive movements in USD terms the market has paused for a bit of reflection.  

Having done so in a week where the offering was below 28,000 bales highlights that low supply is not the driver for the market.  

It will generally hold the market, or have a short-term influence, but demand is and always will be king.  On that front there is not a lot of improvement hence the reality check or pause this week.

Ultrafine wools, 15 micron and finer are in very short supply, but those few lots which are being offered in the auction are getting very good support as traders and processors either anticipate orders or have them in hand.  

Superfine merinos were off a tad this week, and medium merinos a touch more with the lower quality wools being neglected by a very fussy trade, which didn’t help the overall mood nor the final closing prices.  

Interestingly, a lot of export quotes for greasy wool and wooltops were unchanged this week highlighting or confirming the nature of the current market, being one of stagnation or pausing for reflection rather than embarking on a new trend one way or the other.

Crossbred wools continue to edge higher on the back of small supply and steady demand, which seems hard to comprehend given that only 12 months ago the market was virtually drowning in a sea of crossbred stock.  

It has really been a remarkable achievement to process and sell all of the greasy crossbred wool which had been lying around the world and get back to virtually a clean slate again now.  Whether any of the current products will still be in fashion beyond the current season, and more importantly whether they can sustain a significant price increase in the greasy wool should play out towards the end of this year.  

In the meantime growers can be content that prices have increased from where they have been for the past couple of years, and thankfully so has the lamb price.

Overall, the wool market has been range trading, and in most micron categories for the past three years, which is an unusually long period of time to be doing nothing.  

Range trading is safe for those in the pipeline who do not like, or cannot manage, the volatility, but for many it is boring and not particularly productive. 

At so many points along the production pipeline the margin available is so skinny that simply trading on a back-to-back basis only just covers overheads and doesn’t provide a margin or a profit.  

This is due in part to the overcapacity in the industry, particularly in the early stage processing like combing, but also just the competitive nature and the shopping around of a fairly generic product which buyers are able to do.  

Some of this may change in the future with some excess capacity being removed from this industry this year, although combing mills have a habit of rising from the dead when good times return, but also the traceability and sustainability programs which, if managed properly and adhered to, should create more dedicated supply chains which will be less affected by competitive forces.  

Of course that will also require growers to commit to a multi-year price and remain committed even if the spot market rises above it, as processors or retailers will need to do, ignoring the opportunity to purchase outside of the supply chain even if it is cheaper. 

The success of such supply chains is more likely now than in years gone by, where many have been overturned by a lack of willingness from one party or the other, and often by seasonal conditions upsetting the specification status quo.  

These days farm management is much more adept at managing the seasonality of nutrition and,  therefore, fibre performance and the traceability measurements being generated can actually mean something to the consumer rather than just marketing mumbo jumbo.  

Processors and retailers on the whole, when they are committed to a supply chain rather than just fishing about for an idea, do understand the need to pay a premium for such wool and when it is done well and managed properly it came be enormously beneficial to both sides.  

This sort of program is not for everyone or every product and will only apply to a small but growing segment of the industry.  

For the remainder of the industry who are uncomfortable with the volatility which is soon to arrive there is always the futures market.

Despite the comment that supply does not ultimately drive the market, it is still an important factor, and something which everyone on the buy side pays attention to.  

Lots of people are asking questions of their Australian connections at present about the new financial year and how many bales will be offered in sale one. 

Last year the first sale was quite a modest total of 36,000 bales, and this year is currently forecast to be 38,000. 

However, week two saw the supply jump to 55,000 bales last year.  

Estimations for the quantity this year are not yet available, but Fremantle will again have no sale in week three due to a lack of wool so nobody expects it will be a huge sale this year like it was last year.  

So, supply is proving to be a bit difficult to predict as usual, and demand is stable at a very low basis.  

There is a fair contingent of wool exporters, traders and processors heading to Italy this week for Pitti Filati where they will perhaps do some business, but at the very least they will get a first-hand understanding of when the European situation will improve.