Chris Wilcox

Executive Director, National Council of Wool Selling Brokers of Australia

Chairman, Market Intelligence Committee, International Wool Textile Organisation

Uncertainty has dominated the Australian wool market in the first half of the 2019/20 season. The uncertainty has been on both the supply side and on the demand side and has brought the most extreme volatility of Merino wool prices seen for many years.

Uneven economic conditions, mixed consumer confidence, patchy retail sales of clothing and has held back orders from retailers and caused a slowdown in demand throughout the wool textile chain, back to raw wool. In its latest forecasts for economic growth around the world in 2019, 2020 and beyond, the International Monetary Fund forecasts that world economic growth in 2019 will be just 3%, the lowest since 2008/09 at the height of the Global Financial Crisis. Growth is expected to pick up to 3.4% in 2020, due to better economic growth in Latin America, the Middle East and central Europe. The IMF predicts that economic growth will slow in 2020 in the US, Japan and China, and improve slightly in the UK and in the Euro zone. These subdued forecasts provide a downbeat backdrop to wool demand from retail back through the wool processing chain.

The current trends and levels of consumer confidence in the major wool consuming countries reflect the uncertain economic conditions in many countries. Consumer confidence in the EU has weakened over the past 12 months as the economies in the EU have weakened. There has been a particularly sharp fall in consumer confidence in Japan in the past 12 months to the lowest level since 2012. Consumer confidence in South Korea also remains well below the levels seen in 2017 and the early part of 2018.

In contrast to these rather gloomy consumers, consumers in the US remain upbeat, helped by still strong economic conditions, low unemployment levels and signs that wages are rising. The surprise in the latest figures is the strong consumer confidence levels reported in China. This is in contrast to the lower economic growth rates in China recorded recently and the impact of China’s trade war with the US.

These mixed consumer confidence results translate into retail sales for some countries, but not all. The latest clothing retail sales growth data for 2019 to date compared with the same period in 2018 show a very mixed picture. Retail sales in Germany and the UK have both surprised on the upside and contrast with the negative economic conditions and consumer confidence levels. Other countries have recorded lower growth rates for retail sales this year, including the US.

One of the most notable results is for China, where retail sales of garments have grown by just 3% year-on-year in the first eleven months of 2019. This is the slowest rate of growth for clothing retail sales in China at least since 2000.

Another factor adding to the uncertainty for mills in the wool textile industry in China has, of course, been the impact of the US-China trade war. There has been some easing of the tensions in mid-December, with the announcement of the Phase One agreement between the two countries. At the time of writing, there is a lack of clarity in what is specifically in the new agreement. One thing that has been confirmed is that the additional new US duties that were due to be imposed on a range of products on 15th December were suspended, although no wool products were included in this so there is no direct benefit for wool. The US will also halve its 15% duties to 7.5%. on about US$120 billion on imports from China. The products that are to have the duties halved may include the duties on wool garments which were imposed in September, but that is not yet clear. The original import duties resulted in US imports of wool clothing from China slump by between 40% to 45% in October, which followed a 15% drop in September. If the additional duties on wool garments are halved, then this will boost the trade between China and the US, helping mills in China and ultimately raw wool demand.

The combination of the sharp fall in US imports of wool clothing from China, the slow growth rate for clothing retail sales in China and the slower retail sales growth in the US explains why excess stocks of finished wool garments, fabric and yarn have built up through China’s wool textile industry. As a result, raw wool demand by China from Australia and other major wool exporting countries has fallen. Exports of raw wool by the five major wool exporting countries (Australia, New Zealand, Uruguay, South Africa and Argentina) to China dropped by 16% year-on-year for the four months to October 2019. Only 85 mkg of wool was exported to China from these countries, which is by far the lowest since at least 2009.

But it is not only China that has reduced its raw wool purchases. The other major processing countries also saw a sharp decline in demand for raw wool in the July to October period. There was an 11% decline in exports to India, a 16% fall for Italy, a 32% decline in exports to Germany and a 12% drop for the Czech Republic. All of these countries recorded the lowest level of wool exports from the five major exporting countries at least since 2009.

For the first four months of the 2019/20 season, Australia’s wool exports were 21% lower in volume terms and a massive 40% lower by value. Wool exports from New Zealand, Argentina and Uruguay were all lower this season to October compared with the same four months in 2018/19. The exception to the decline in export volumes is South Africa, where wool exports were up by 43% compared with this time last year. This is almost entirely due to the resumption of trade between South Africa and China following the ban following the Foot and Mouth Disease Outbreak.

The uncertainty and weakness in demand has met lower wool production in and supply of wool from Australia, the world’s largest supplier of Merino wool. The latest forecast for shorn wool production from the Australian Wool Production Forecasting Committee is for shorn wool production to fall by 9.2% to 272 mkg greasy this season. This is the lowest level of shorn wool production in Australia since the 1923/24 and has been driven by a prolonged and intense drought in major sheep-growing regions in Australia.

Despite this, auction offerings have fallen by just 6% in the first six months of the 2019/20 season, while the volume sold at auction dropped by 11.3%. There was, however, one extra sale week this year compared with the same period in 2018/19, so the decline is smaller than it might have been otherwise. The pass-in rate at auction is substantially higher this season because wool prices are much lower than a year ago. The Eastern Market Indicator has averaged 1548 Ac/kg in the first half of this season, compared with an average of 1962 Ac/kg in the first six months of 2018/19. Some growers have chosen not to sell their wool in the hope that prices will increase. This reluctance to sell has resulted in a higher volume of wool held in store in Australia this season.

A significant contributor to the build-up of raw wool stocks in Australia has been the extreme price volatility. While over the past 20 or 30 years there has been periods of significant volatility in wool prices, the level of volatility in the first three months of 2019/20 was at the highest level in at least the past 20 years or more. Prices have stabilised since October, with prices lifting in the last two Australian auction sales prior to the Christmas recess.

Outlook for 2020

The negatives against the wool market had been building over the first six to nine months of 2019 and were the trigger for the inevitable pull-back from the Supercycle peak price for Merino wool. The positive news of an easing of tensions between the US and China may help to bring a modest lift in demand from retailers back through the wool textile chain. This and the sharp decline in raw wool purchases by the major wool processing countries seen in the past few months will help clear the excess stocks that had built up in the wool textile industry which will in turn bring improved raw wool demand.

On the supply side, although Australia’s wool production is predicted to be the lowest in almost 100 years, wool supply from Australia will be supplemented by the release of wool held in wool broker’s stores and on-farm if prices start to rise. Therefore, the supply of wool from Australia in the January to June period of 2020 season may be only a little lower than in the same six months in 2019.

The stabilisation of Merino wool prices since October suggest that we may have reached the bottom of the wool price cycle when the EMI hit a low of 924 USc/kg on 30th August. The EMI has recovered since then to 1067 USc/kg at the close of 2019 before the 3-week Christmas recess. I still think that we will see a slow and moderate recovery in Australian wool prices over the first six months of 2020, confirming my view in September. The recovery will no doubt be uneven, with periods of prices sliding then rebounding. I would be surprised to see prices return to the heights seen in 2018/19 but I believe firmly that demand and prices will improve in 2020.