Wool market drops like a stone

Wool market drops like a stone


Sheep
There have only been two instances where the EMI has moved more than 100c/kg in a single day, both of which occurred in the last six weeks.

There have only been two instances where the EMI has moved more than 100c/kg in a single day, both of which occurred in the last six weeks.

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There have only been two instances where the EMI has moved more than 100c/kg in a single day, both of which occurred in the last six weeks.

Aa

The wool market continues to frustrate everyone with its crazy gyrations and last week was no exception.

After expecting a slight easing to correct for the previous overshoot, the market dropped like a stone.

Not as significantly as we saw back in August, but a tempered steady reduction it was not.

South Australian markets cited some interesting facts to put the recent market movements into perspective in their weekly note on the AWI report.

They highlighted the current volatility measure for wool is sitting around 40 per cent, which is huge for a commodity.

The Eastern Market Indicator (EMI) has only moved by more than 50 cents a kilogram in a day 19 times throughout history, but seven of these have been in the last two months, and there have only been two instances where the EMI has moved more than 100c/kg in a single day, both of which occurred in the last six weeks.

So, we do indeed live in volatile times as far as the wool market is concerned.

"Why is this so?" as the great professor used to ask.

Part of it is no doubt the trade war, and this point on the graph will no doubt be annotated as such by analysts in the future.

For a long time the wool market ignored the trade war, and continued rolling along with prices steadily increasing.

There were few, if any actual tariffs applied to woollen garments and the amount of wool exported from China to America was not thought to be significant enough to derail the luxury train on which wool was travelling.

As we have seen with the Indian Pacific last week, where a bout of gastro caused a bit of havoc and a few carriages had to be isolated and quarantined, things if left untreated can derail the most scenic and luxurious vehicle.

There were also a few murmurings about how many eggs the industry had in one basket - being China.

That has not been an overnight change obviously, but over the past 20 years processing capacity has flowed to the lower cost, but politically stable environment.

To China's credit, the wool fraternity in China has grabbed the opportunity with both hands and built a very good, technically competent processing industry that is thus far avoiding the ongoing pull to relocate to lower cost countries in South-East Asia.

Having a large, growing domestic market for the product, one that is protected to a degree by nationalism and tariffs, is helping keep the processing within China's boundaries.

The fact that 75pc of Australia's wool goes directly to China for at least first stage processing has served the industry well for the last decade, but it also means that when China sneezes, we catch pneumonia.

As China's economy has slowed, in part as a result of the trade war, and in part as an outcome of the maturation process, the wool market has tripped up rather spectacularly.

China's economy was slowing before Mr Trump came along, and as we all saw last week the growth and modernisation of the place in the past 70 years has been nothing short of astounding, especially over the past three decades.

But that massive growth comes with a caveat, that it must be adjusted or reined in at some point.

The Chinese government has been frantically applying the brakes over the past couple of years as the continuous surge in house prices, wages and standard of living increases threatened to get out of control, as did government debt, which has fuelled so much of the growth.

The ABS finally kicked in a bit more savagely than expected, at the same time Mr Trump appeared to upset the apple cart, and at the same time African Swine Fever broke out to decimate the pork industry.

Having the price of their number one source of protein skyrocket just after many everyday investors had lost their savings when the stock market wobbled, house prices went backwards for a change and employment uncertainty became a reality, was a bit much to bear for the average Chinese consumer.

People in China slowed their spending, not stopped completely, but measurably slowed down, and for a market in overdrive as the wool market was, this was akin to putting a stick in the bicycle spokes.

The market didn't have to slow as much as it had done, and everyone involved believes it has been a massive over reaction, but all of a sudden there was no new "hot" item this year, such as fake fur, double faced fabric, or generous uniform allocations.

The industry had become accustomed to receiving this boost in June/July, and continuing to process like mad over the summer period.

The rest of the global processing industry was slowing down as the Europeans headed for the beach.

The Chinese industry ploughed on, making products as fast as they could, destined for their growing local market.

Then, along came a few of the speed bumps mentioned and the music stopped for a beat or two.

As a result, we have seen a total over reaction but a correction that was, in hindsight, needed to allay some of the price resistance that was building in many markets around the world.

These markets were trying to say 'it is too expensive', but nobody would listen as the Chinese juggernaut rumbled along, until eventually a wheel fell off.

With the current yo-yo gyrations of the market those attempting to chase it are getting belted from pillar to post, but those who have a strategy will be the ones to survive and come out into clear air the soonest.

Whether it is growers trying to 'pick' the best week to sell when they should be putting their wool on the offer-board at their target price or using GTC levels on futures to manage their risk, or whether it is processors and traders wondering what to do tomorrow versus those who have already formulated a strategy for the year ahead in terms of processing capacity and targeted selling arrangements, there will be some casualties and some congratulations.

At the end of all the turmoil we will have a product that is sought after by consumers across the globe because unlike oil-based fibres it doesn't choke the world's oceans every time you wash it.

It is infinitely renewable, sustainable and more importantly it is actually a bloody nice fibre to wear.

The time is rapidly approaching where we can reset, punch the marketing button very firmly, and launch this fantastic product called Merino.

The story Wool market drops like a stone first appeared on Farm Online.

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