Monthly Market Reports

May 2012

1 June 2012

In this edition of the Market Intelligence report we focus on happenings in the current market, both here in Australia, but also in some key markets.

Uncertainty affecting greasy wool buyers

The greasy wool market in Australia has softened substantially in the past months, and while still historically high, the price changes are understandably concerning for all who invest in raw wool production and marketing. Our view remains unchanged that the price fundamentals remain positive for supporting the wool price in a historically high price range, driven primarily by the tightness of supply, and the emergence of China as an affluent consumer market.

However, remembering that the price of wool at auction reflects supply, demand, and the risk associated with the purchase, we hear that the recent dramatic gyrations in our foreign exchange rate, and tightening of lines of credit for buyers are having a dampening effect on the market. Certainly, the trade commentary at the IWTO Congress in New York was a mix of long-term bullishness, and short term anxiety – most we spoke to see the coming months as weak for wool prices, before an expected recovery in our Spring.

Raw wool prices rises are affecting retail margins

One of the truisms in our long pipeline is that price rises at this near end of the pipeline eventually emerge to impact at retail. Even though the cost of raw wool and early stage processing only represent a small proportion of end-product retail value, rises in these costs add to the cost of business of everyone further down the pipeline, and eventually impact on retail margins.

By way of context, between 2010 and 2011, wool prices in Australia rose by 50% in US dollar terms, and labour costs in Chinese textile mills rose by around 20% - representing a dramatic increase in the cost of doing business for our major manufacturing partners in China.

As an insight into what has occurred in Western Europe and the USA, the following chart summarises the year-on-calendar year changes in import volumes, retail value, and retail volumes for clothing products (all fibres). Against a backdrop where sales volumes were largely static (+0.5% in USA, and -0.1% in Western Europe), note how retail value rose by only 3-5%, while the cost of imports rose by 15-17% - the difference representing a major squeezing of margins for retailers.

Our forward view is that our US and Western European markets will remain subdued, and that real growth prospects for wool demand reside in our emerging consumer markets, and in our emerging product categories - outdoor, urban and infants and maternity.

China underpins E. Zegna profitability growth

In the midst of some of the European retail sector gloom, the annual result of Ermenegildo Zegna stands like a beacon, and underlines the importance of the emerging affluent consumer markets in Asia.

E. Zegna’s net profits have nearly doubled in 12 months, rising from EUR60m to EUR115m. Overall sales turnover increased by 17% to EUR1.13b, which comes on the back of the 21% increase achieved in 2010. Sales increased by 28% y-o-y in China, which is now EZ’s main market.

The company plans to increase the number of retail stores by 9% (50) in 2012, of which one-third will be in China. Interestingly, the company has foreshadowed plans to open stores in Africa, with new outlets planned for Morocco and Nigeria.

Trade News

The latest data from China Customs, published on the China National Textile and Apparel Council (CNTAC) website, shows the value of garment and textile production rose to US$29.57b and US$20.44b, representing a year-on-year growth of 3.9% and 1.4%, respectively.

Recently, a 10-year plan has been approved by CNTAC with the aim to increase textile and clothing exports by an annual rate of 7%, raising the export value of fibre products to US$400b by 2020. This is foreshadowed to be be achieved through investing in new technology, design and the rise of domestic demand.

CNTACT forecasts spending on clothing by the Chinese urban consumers to grow by 12.5% year-on-year to 2020. The latest figures from China’s National Bureau of Statistics shows spending on garments jumped 19.5% in April from a year earlier, and have grown at an average monthly rate of 21.6% over the past ten months.