Wool report - Quality concerns add to volatility

THE Australian wool market is still being challenged by a myriad of factors not the least of which is the currency volatility, although since the auctions closed on Wednesday afternoon the local currency has fallen by nearly a full cent against the Greenback, so this should see some positive price movements for Aussie growers in the coming week.

In USD terms the market was only a couple of cents lower, but the average indicator does not really tell the full story. Superior quality wools with the right specifications, and particularly the favoured certifications are increasing in price, but the market indicator is hampered by the volume of poorer quality wools in buyer’s eyes which are being significantly discounted in price.

The disparity between the offering has shifted from Sydney, which previously had what was considered the lower quality catalogues in Australia, to Melbourne and Fremantle where yield in particular is now in dire straights. Sydney now has the higher quality catalogues on offer each week.

These wools in Melbourne and Fremantle in themselves are not bad wools, as the tensile strength and mid point are reasonable, but such are the vagaries of the processing trade that Chinese scouring mills are unable to cope with such low yields.

Besides the actual cost of shipping so much of our dirt and topsoil to China the scouring mills in China usually charge significant premiums for lower yielding wools and the resultant effluent disposal costs, as well as simply perform badly when faced with 50 or 60 per cent yields which they cannot wash properly.

So, buyers in the auction are forced to still try and average 68 or 70 per cent yield across a parcel of wool resulting in huge premiums for high yielding lots and increasing discounts for those at the lower end of the range.

Apart from the quality issues, the market is battling on trying to remain positive as the many global issues circulate through the media and serve to keep consumers on the back foot.

The vacancy at the Vatican has now been filled so that is one box ticked, and perhaps we will see a flurry of orders for new liturgical vestments.

But there are several others which still need attention, and the major one being the chat in Geneva over the weekend between America and China.

Although the US-Sino wool trade is not huge and is not directly affecting the wool market, the uncertainty that has been generated since the whole Liberation Day kerfuffle started had induced a degree of paralysis in manufacturing industries all over the globe.

Mill owners in China are unsure of how their export markets will be affected in the current environment, so rather than power ahead, many are instead reducing production to a bare minimum while they wait for more clarity.

Card games in the afternoon seem to be the most popular method of dealing with the current situation. 

There was another bump in the road which appeared on Thursday night when South Africa reported an outbreak of Foot and Mouth Disease, which resulted in an immediate suspension of shipments to China.

RWS certified wool immediately became a very sought-after commodity given the relatively large volume of this certification which comes from the Cape. But all the work done in previous outbreaks by the industry in South Africa to establish agreed protocols to allow shipments of greasy wool to continue after certain conditions are met meant that once China had found someone willing to sign the documentation the ban was lifted again.

So after quite a bit of panic and consternation in the international trading community all has been resolved, albeit that there are only four remaining sales in South Africa before the recess anyway.

Sales of greasy wool and wooltop in the Chinese domestic market were more difficult last week with growing uncertainty adding to the financial pressures, particularly on the smaller operators, many of whom have term payments falling due shortly, but have not been able to on-sell their products, so cashflow is becoming a significant issue locally.

The Chinese government did make some adjustments last week to their interest rates and seem quite happy for their currency to continue to weaken against the US Dollar which provides some assistance to their exports in the short term.

The psyche of the Chinese consumer, however, is still very downbeat and most agree that it will take a big bang type of stimulus to revive the retail economy in China given the backdrop of falling apartment prices and increasing unemployment.

That big bang approach doesn’t seem to fit within the remit of the current establishment though, so progress is likely to be slow and painful.

For those who have been around for a while, which is most people either growing, exporting, trading or processing wool, the cyclical nature of the industry always comes back around again, and things improve. Hanging on until times improve does seem to be getting tougher with each cycle with external factors like drought adding to the pain but the industry has all the building blocks in place to capitalise on better times when the geoeconomics allow, and the drastic supply situation also means that when demand does improve the price reaction will be significant.

There are some very small positive indicators starting to emerge from Europe, but they are probably not yet significant enough to even call them green shoots.

But there have been more inquiries for wooltop and yarn from Italy, albeit decisions still take days or weeks before an order can actually be delivered.

If the Ukraine situation can be resolved shortly and Germany’s infrastructure spending provides enough stimulus to the rest of their economy, we could actually see something positive happen across the textile industry in Europe after a pretty dour couple of years there.

So, this week’s auction should see some more positivity pending currency movements, and hopefully if a few other issues get resolved over coming days and weeks we can see this thing begin to turn around.