Chris Wilcox

Executive Director, National Council of Wool Selling Brokers of Australia

Chairman, Market Intelligence Committee, International Wool Textile Organisation

What a tumultuous 12 months it has been for the world and for the global wool industry! While there were economic and geo-political tensions and stresses affecting the world 12 months ago, and signs that demand for wool, including fine Merino wool, was faltering, nobody could have possibly foreseen the upheaval and turmoil that we have seen unfold in 2020. It has been a day to day proposition to managing this upheaval and chaos over the past few months. Trying to foresee what might lie ahead has become almost impossible.

COVID-19 has hit general retail sales hard in all the major consuming countries and it seems that clothing retail sales have been amongst the hardest hit sectors. The latest data shows that for the year to July, retail sales this year plummeted in most countries, the exception being Germany and, to a lesser extent, South Korea. Elsewhere, the declines are gobsmacking. Japan recorded a 32% drop in clothing retail sales in the seven months, while the United Kingdom saw a 29% drop. Clothing retail sales in the United States were down by 20%, while Italy has recorded an 8% decline.

China, the world’s largest retail market for wool clothing, reports that clothing retail sales were 20% below the levels seen in 2019 for the January0July period. The more positive news from China is that the declines in clothing retail sales in May, June and July were much smaller than the plunge seen in February to April.

Hopefully we will also start to see a recovery in these major wool consuming countries as they slowly ease restrictions before the critical Autumn/Winter season, although this will probably come too late to help demand for raw wool in the near term, which has slumped this year.

This slump in raw wool demand has caused a disheartening, relentless decline in Australian wool prices since March. Prices fell to the lowest in a decade by 4^th September. In general, textile fibre prices have been hit the hardest by the COVID-19 pandemic of all the key commodities, probably because of the severe impact of COVID-19 restrictions on clothing retail sales around the world and the resultant collapse in orders through the textile industry.

Wool prices have seen an even larger fall than have prices for other fibres. In A$ terms, the Eastern Market Indicator (EMI) is down by 45% since the start of 2020 to 4^th September and are down by 23% since the start of the 2020/21 season. In US$ terms, the EMI is 41% lower than at the start of 2020 and 18% lower since the start of the 2020/21 season.

Prices for other textile fibres have fallen since the start of 2020 but have performed better than wool. Acrylic fibre prices are 16% lower since the start of 2020 but are 4% higher since the start of 2020/21. Prices for polyester staple fibre are 21% down on the start of 2020 and 3% lower than at the start of 2020/21. Cotton prices are 9% lower than at the start of 2020 but are 4% higher than at the end of June. Cashmere prices are down 23% since the start of 2020 and are flat compared with the start of the 2020/21 season. Between January and August, the NZ broad wool price was down by 29% while the British Wool Marketing Board market indicator down by 40%. The prices for this broad wool have improved a little since the start of the 2020/21 season.

While Australian wool prices have declined in 2020, there is some faint glimmers of positive news. This includes a lift in the premiums paid for superfine wool over medium Merino wool. The premium for 16.5 micron has risen particularly sharply. After the large declines in the premiums for superfine wool seen from the start of 2018, this rebound has pushed the current price premium for 16.5 micron wool to 49%, well above the long-term average and a major recovery from the low of 7% hit a year ago. The premium for 18 micron wool over 21 micron wool has risen at a slower pace and is now at 22%, a little above the long-term average. As with 16.5 micron wool, this an impressive recovery from the low of a premium of just 4% in June 2019.

One thing that may assist a recovery in raw wool demand is that wool’s price ratio against cotton and synthetics has fallen back sharply in the past 6 months. The drop is particularly marked compared with cotton prices. The current ratio for Australian wool price (using the EMI) against the cotton price is 4.03:1, down from 6.51 in August 2019 and the lowest since March 2014. The decline in wool’s price ratio compared with the major synthetic fibres used in apparel (acrylic and polyester staple fibre) is not as large. The current ratio of Australian wool price to the synthetic fibre price is 4.55:1, compared with 5.41 in August 2019. The current level is the lowest ratio since May 2011. The decline in the price ratio means that wool’s competitiveness has improved, which may help support wool prices through increased demand from mills.

Another challenge for the industry is the low level of wool production, notably from Australia. The total wool production for the world will decline by 1.7% in 2020 to the lowest level seen in more than 90 years. This will be driven by lower production in Australia and in China, the world’s two largest wool producing countries. Shorn wool production in Australia in the 2020/21 season is predicted to be at 280 mkg greasy, down by 1.1%. This decline is despite much better rainfall and seasonal conditions in most of Australia after the prolonged drought and is caused by a decline in sheep numbers. This is the smallest wool production for Australia since 1923/24.

An uncomfortable outlook for remainder of 2020

If anybody tells you that they know what will happen for the rest of 2020, they are fooling themselves. The huge uncertainty about the renewed spread of COVID-19 in major wool consuming markets makes it very hard to know what will happen to clothing retail sales, retailers orders and orders through the wool textile industry.

Even so, the challenges facing the Chinese and Australian wool industries over the next six months will be intense. It will be uncomfortable as mills and wool growers respond grapple with the lower demand, the lower wool prices, a lower US$ and the uncertainties surrounding the COVID-19 pandemic.

But it is important that we do not despair. The collapse in Australian wool prices over the past six months is a massive change in sentiment and conditions after the long supercycle price rise from mid-2016, with the peak at all-time highs in August 2018. Even then, prices fell from the peak only slowly and remained at historically high levels for another 12 months. With all the negative news from around the world about the impact of COVID-19, particularly on economic growth and consumer sentiment, it is easy to think that the decline and low wool prices will be here forever. This is the exact opposite of the sentiment when prices were rising and then at the peaks for such a prolonged period. At the time, it felt like the high prices were here to stay.

Both impressions are misplaced. The decline will come to an end and prices will rise again, as the few glimmers of positive news being seen now grow stronger and more sustained.

It is vital that all the industry understand the current situation in the global industry and the challenges this presents, then work together to meet the challenges and grasp the bright opportunities for wool as they unfold.