Wool prices fall sharply amid global unrest

Wool prices fall sharply amid global unrest


Sheep
The Eastern Market Indicator is now sitting at 1513 cents a kilogram.

The Eastern Market Indicator is now sitting at 1513 cents a kilogram.

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The Eastern Market Indicator is now 1513 cents a kilogram, the lowest level since June 2017.

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Wool prices in the Australian wool market dropped alarmingly in the last two weeks.

The Eastern Market Indicator (EMI) is now 1513 cents a kilogram, the lowest level since June 2017 when the Merino wool price super-cycle was on the way up.

Clearly, the negative sentiment in the wool market was triggered by the Trump administration's announcement of 10 per cent import duties on the remaining imports from China three weeks ago, and the subsequent devaluation of the Chinese renminbi.

The decline in the EMI since the peak exactly one year ago (including the sharp falls in the past fortnight) follows a pattern we have seen for all five super-cycles over the past 30 years.

That is a strong rise in wool prices, which lasts longer than expected and reaches a peak before a price downturn, triggered by an outside event but when conditions in the wool textile industry have reached a state ripe for a decline in wool prices.

Prices then retrace a significant portion, but not all of the price gains seen in the super-cycle.

Prices have fallen by about a third from the peak for each of the past three super-cycles.

So far, prices for the current super-cycle have dropped by 28pc in Australian dollar terms and 33pc in US dollar terms since the peak in August 2018.

As well, for each of the past four super-cycles, the low point following was higher than the low point for the previous super-cycle.

The current level of the EMI in both Australian and US dollars is above the low point in the 2011/12 super-cycle. History, therefore, brings us hope that we are nearing the end of the current price decline.

President Trump has softened his stance and delayed the new duties on a number of consumer products, following pressure from US retailers who fear the significant impact on US consumers and their businesses.

A review of the list of products that will incur a 10pc duty as of September 1 shows that, disappointingly, the key wool clothing products imported by the US from China, such as men's wool suits, wool trousers, wool jackets and wool sweaters, are included.

This, no doubt, has added to the concerns of the Chinese wool textile industry about orders for the coming autumn/winter in the northern hemisphere.

This has added to the considerable global geopolitical and economic uncertainty, including the upheaval in Hong Kong, increasing tension between Japan and South Korea, and news Germany's economy went backwards in the last quarter with fears it is entering a recession, which is all on top of the US/China tensions.

These events, as well as the difficult business conditions for wool textile mills, notably in China, are likely to prevent a reversal of the downturn in wool prices in the near term, despite the forecast of lower wool production in Australia in 2019/20.

We may, however, see some steadying in the wool market in coming weeks.

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