Monthly Market Reports

July 2012

30 July 2012

This month we look closely at the impact of the unfolding financial crisis in Europe on the European clothing market, and focus more closely on Russia as an emerging market for our fibre.

Our Russian odyssey

Many of us are old enough to remember when the USSR was a major purchaser of Australian wool in the mid-late 1980s. The USSR purchased up to 20 per cent of our clip. With the collapse of the USSR from 1987, the USSR wool processing industry effectively fell into ruin, and the Australian wool industry lost a major customer.

With this in mind, it is very positive to note that over the past fortnight AWI has been leading a delegation of Australian wool buyers and exporters to back to Russia and Belarus, where interest in the purchase and processing of Australian wool is re-emerging - Belarus as a early-stage processing hub in Central Europe, and Russia as an increasingly affluent consumer market.

To mark this occasion, we provide some economic insights into Russia - our expectation is that Russia and surrounding states like Ukraine and Belorussia will be increasingly important for our futures.

  • Russia is one of the key members of the quartet of emerging economic powerhouses termed the 'BRIC nations' (Brazil, Russia, India, China) - Russia is now the world's 7th largest economy at US$2.4 trillion - larger than UK, France, Brazil or Italy. Russia is also the key player in the Commonwealth of Independent States (CIS), a loose federation of 9 former USSR states including Belarus.
  • By contrast to the Eurozone as a whole, economic growth in the central European region is extremely rapid, as shown in the GDP growth rate data and forecasts shown below, taken from the just-released IMF World Economic Outlook:

 

  • Russia's rapid economic growth is being driven by mineral and energy wealth -Russia now the second largest exporter of oil in the world, and the largest exporter of natural gas, with the world's largest proven reserves of natural gas.
  • Relative to the indebtedness crises engulfing the Eurozone, USA and Japan, Russia has the lowest debt to GDP ratio of any of the large developed economies around the globe.
  • In July 2012, the Russian parliament (Duma) ratified the agreement for Russia to join the World Trade Organisation - Russia plans to reduce its average tariff rate from 9.6 per cent to 6 per cent by 2012, providing a stimulus to importers.
  • While Russia's population of 138 million are enjoying rapid income growth and low taxes, the population is declining (negative population growth) at a rate of 0.5 per cent per annum, which is a concern. Nonetheless, Goldman-Sachs expects that Russia will be the only BRIC nation which matches established Eurozone average wage levels by 2050, so we expect the rapid growth in the Russian clothing market, especially imports from the Eurozone, to continue.

Early reports from the Australian delegation are very encouraging - however, it will take time to build relationships and iron out the logistics. Nonetheless, we should all expect to hear more of Russia and Belarus over the coming decade, as an important destination for our wool.

Segmenting the European clothing market

Recently, the phrase 'economic uncertainty in Europe' has been widely used in newspapers, articles and reports. It is important to note, Europe is not a country. It is a region comprising of numerous countries with different economic conditions. Therefore it is worth awhile to share some insights into the different apparel markets and future prospects.

The apparel market in Western Europe is largely made up of UK, Germany, Italy and France. These four countries are known as the 'Big Four', making up 65 per cent of Western Europe's total apparel sales. The chart below shows, using year on year clothing market growth data from Euromonitor, how all four countries took a dip during the Global Financial Crisis. The two largest markets (Germany and UK) in Western Europe recovered after the crisis - however, Italy and France have struggled.


Looking forward to 2015, UK and Germany is expected to continue to grow on average at 3.1 per cent and 2.4 per cent respectively, while Italy and France will slowly recover from negative growth.

The implication for us is one of subdued demand growth for wool - with gains in emerging markets such as China and Russia countering weakness in some of our traditional European markets. Nonetheless, growth expectations remain - for example, PCI Fibres recently released World Synthetic Fibres Supply/Demand Report predicts growth in demand for wool at 0.7 per cent per annum out to 2020.