Monthly Market Reports

November 2011

1 December 2011

The Australian wool market of late has been notable for its volatility, especially within sale weeks. In keeping with our focus on the longer-term trends, or underlying drivers, this month we compare our Australian wool prices against alternative textile fibre prices.

Wool price volatility

The following chart shows textile fibre price trends up to the end of October 2011, expressed as % change from January 2001 values.  The reason we have chosen January 2001 as the starting point is since this coincides with the period when the wool stockpile was finally acquitted – before that occurred, the stockpile was having a significant depressing effect on wool prices.  The wool prices shown are the Australian EMI (basically a proxy for 20-21 micron prices), Australian 28 micron wool, NZ Fine Cross-bred wool (32-35 microns), and the British (Bradford) Fleece Wool Price Indicator – so, we are comparing fine apparel wool prices against interior textile and carpet wool types.

A couple of points to draw to your attention from the data:

  • Over the decade considered, all of the major textile fibres compared show some evidence of a weak appreciating trend – interrupted by the ‘Global Financial Crisis’ in 2008/09.
  • All of the fibres experienced a price ‘spike’ or peak during the 2010/11 financial year, and have since dropped from peak values – most notably for cotton, which has halved in comparative value.
  • Wool prices (fine, coarse, and carpet types) have held up relatively well, and remain well above what could be considered the cross-decade trend – aided by current shortages in global supply, especially in Australia, which supplies around half of the world’s wool less than 24 microns, and around one-quarter of all wool.

Against this backdrop, it is worth considering some trade news, particularly in the light that synthetic and cotton production volumes can be increased or decreased relatively rapidly in response to market forces, compared to wool.  PCI Fibres (November 2011 issue) reports:

  • Synthetic fibres are rapidly declining in China (around 60% of global production), reflecting over-production within China combined with weakness in China’s export markets.  These price declines are expected to level out post-Christmas, aided by the ability of the downstream processors to slow throughput.
  • With the northern hemisphere harvest now well underway, and after earlier dramatic falls, cotton prices have started to level.  However, this should not necessarily be taken as a consumer demand indicator – prices are reportedly being aided by China’s version of a Cotton Reserve Price Scheme, where the state buys the domestic cotton if the price falls below a defined price limit, currently at around US$3/kg (and other conditions are met).  However, there are concerns about the sustainability of price given that this year, production is set to exceed demand by around 2 million tonnes (7.5%), and further price falls may see productive capacity shift back to grain and oilseeds.
  • The primary driver of high wool prices appears to be supply tightness, a situation unlikely to  change quickly due to competing demands for sheep meat.

IMA-Asia (November 2011, Executive Brief) is warning of an Asian slowdown, with China’s GDP growth falling from around 9.4% year-to-date to around 8% over the coming quarters, before tending toward recovery.  With the US and European markets accounting for around 38% of China’s exports, China’s export sector is exposed to falling global demand caused by euro-zone weaknesses.

Together, the forward picture appears to be one of weakness in cotton and synthetic fibre prices, with wool prices comparatively stable due to on-going global supply shortages.

Paul Swan.