THE eastern market indicator may have increased by 115 cents a kilogram in the past 12 months but commentators argue that 2010 will be the year wool’s demand will get its truest test.
Despondency is slowy transforming into a new sense of optimism after a better than expected selling season highlighted the resilience of Australia’s wool industry in the face of the sharpest global downturn since World War II and a soaring Australian dollar.
Thanks to the combination of a plummeting wool supply and an expanding Chinese manufacturing sector (boosted by its Federal Government stimulus spending) the wool market delivered returns above the expectation of most analysts - particularly in the middle micron categories.
While woolgrowers were still crying out for better returns, the market’s scorecard made encouraging reading: a 150 per cent rise in indicator price since February and in the volume wool category, 20 to 22 micron wool lifted 160c/kg over the same period.
While the sub-17 micron sector failed to recover like the medium wool market on a year-on-year basis, it was only down on average 5c/kg.
Industry commentators were now fixed on the first quarter of 2010, where they said the market must continue its price rise if there was going to be the much needed increase in competition, especially given the six- to nine-month lead time for yarn orders.
Malcolm Bartholomaeus, Callum Downs Commodity News said if the view that demand in United States and Europe would improve in the second half of 2010 was right, then there would be a rise in orders in first quarter of 2010.
“We are continuing to wind our way out of economic crisis and the general expectation is that wool’s demand will increase but if this is the case then we will have to see raw wool orders picking up early next year.
“There could be sharp rise in price if that demand comes through. But if that demand does not look like it will develop it could start to put downward pressure on wool prices as early as April/May.”
Based on historical cyclical price rises, the market has moved 50pc to 60pc into its upward price rally and has another 150c/kg to come onto the indicator over the next six months.
Commentators were still cautious about the impact the Australian dollar would have on wool’s competitiveness against substitute fibres, especially with economists tipping the dollar to reach parity in the New Year.
Lempriere Australia executive chairman William Lempriere said the Australian dollar had meant his customers were paying “extreme levels” for wool.
“Price at retail is the issue our customers are most focused on at the moment and unfortunately due to the very high raw material prices they are obliged to accept increases in price of finished garments and that means a weakening in demand for wool,” he said.
“This will be balanced to some extent by the continuing fall in supply, however, the combination of excess manufacturing capacity and the strong dollar means that the correlation between raw wool and finished garment price has never been greater.”
That said, Mr Lempriere could see a light at the end of the tunnel with feedback from retailers that they were seeking to value add and wanted sustainability.
“In times of crisis, smart brands look for innovation, relevance and to deliver the best possible value rather than solutions based on the lowest price only.”
The expected rise in consumer spending as the global financial crises repairs has resulted in upward movements and stabilisation in wool prices for the coming year.
Rabobank has forecast wool price gains to be sustained in the short to medium term, with the extent of any further rises to be determined by the pace at which the world economy recovers and the level of competition from alternative fibres.
Rabobank analyst Adam Tomlinson said “as the recovery in the global economy gathers pace – although more gradual in developed economies – we expect that the desirable nature of woollen garments will remain”.
Mr Tomlinson said while he expected wool production would rise slightly on the back of better seasonal conditions, competition from alternative farming practices would continue to constrain the increase.
Fox and Lillie managing director James Lillie said the major risk in sustainability of the wool industry still centred on the supply, and reversing the downward pattern to deliver confidence back into the sector.
“Demand doesn’t need to grow - its supply that is going to be the factor,” Mr Lillie said.
That said, Mr Lillie was more optimistic about the wool industry than he had been for years.
“Supply is the continual worry but global market recovery has led to consolidation of pricing today.
“I think the outlook is far better than anybody expected for about everything (in agriculture) and wool will be carried along in that general optimism.”
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