Monthly Market Reports

May 2013

29 May 2013

With around four of every five bales of wool produced in Australia destined for China, we keep a very close eye on Chinese wool import data. In this month’s edition of our market intelligence wrap, we examine the most recent Chinese wool import data from our China team, and also introduce a subject we will be addressing in more detail in coming issues – the apparent disappearance of price premiums for traditional superfine wool in our market.

Strong year-on-year Chinese wool import data

Following the expected decline in activity around the Chinese New Year holiday season, March and April 2013 were extremely strong months for exports of Australian raw wool to China - total raw wool imports rose by 6 % to 40.7 mkg in April, up 29 % in volume and 12% in value terms on the same month last year. For the 4 completed months of 2013 (Jan – April), imports of Australian wool into China were up 10.4% year-on-year in volume terms, and 4.7% in value terms.

The following chart shows year-on-year comparison – the 2012 data (blue line) shows the normal season pattern to raw wool imports to China from Australia, with Autumn and Spring/Summer peaks, and troughs in late Winter/early Spring and in the New Year (associated with the Chinese New Year festival).

This year, the Chinese New Year festival was in February, which is why the timing of the trough was one month later than in 2012, when the Festival occurred in January.

Looking ahead, we expect a couple of factors to influence the Australian market:

  • Auction offerings declining toward their normal June/July minimum, meaning supply will be tight
  • Uncertainty in the financial markets, and an expected short-term sell off of our currency pushing the Aussie below parity. While weakening of the Aussie dollar assists Australian growers, the volatility does makes for difficult trading conditions for exporters.
  • The gradual exit of Viterra/Landmark from wool exporting operations over the coming 9 months will add to the short-term uncertainty – however, we expect that the many other wool exporters operating in our markets might see this as a benefit, especially given that the equivalent of 15% of market share is now up for grabs.

The case of the missing premium...
Recently, the Australian Superfine Woolgrower Association, with AWI support, completed a review of the superfine wool sector – focussing particularly on the prospects for the traditional fine crimping Superfine and Ultrafine Merino wool. A key motivation for the review has been the relatively poor returns for producers of these wools, especially the shedded variety in recent years.

The study confirmed that prices paid for traditionally bred, grown and prepared Superfine and Ultrafine wools are not sufficiently ‘premium’ compared to non-traditional wools in the same diameter ranges to cover the inherently higher unit production costs. This was mainly due to the fact that premiums paid for ‘Australian Superfine’ fleece (ASF) styles have declined dramatically since 2009 (post-GFC), from an average of 40% to around 11%.

In a nutshell, this reflects lack of competition in the auction room for these types since the GFC – and so logically, lack of sufficient demand-side recognition of a unique and defensible value proposition for fine crimping Superfine and Ultrafine Merino wools. We will cover the 'why' aspect of this change in a future edition of this e-newsletter, and some possible remedies.