Monthly Market Reports

October 2011

1 November 2011

Continuing the price-related insights theme from the previous edition, this month we brief reports on price-related observations and drivers.

Wool prices
The price rally experienced by the Australian wool market toward the end of October 2011 was notable for a couple of reasons:

  • it signalled the welcome return of a number of topmakers to the market, after a period of what we interpret was holding off purchases in order to effect a price correction;
  • it meant that the EMI has now been above US$10 per kg now for a period of 12 months (November 2010 to October 2011). This has only been bettered by the 13 month stretch which occurred from February 1988 to February 1989 period, which corresponded with the artificially-induced peak of the Reserve Price Scheme. These changes are shown graphically in the chart below, along with the statistical annualised price trends for the wool stockpile and current eras.

Economist Intelligence Unit update their wool price forecasts
Last month, we reported the release by ABARES of their Quarter 1 (September) 2011 Australian Commodities, which included a section on the outlook for wool, and outlined an expectation that the EMI would average around AU$12.00 for the financial year 2011/12.

This month we report the latest forecasts by the Economist Intelligence Unit (EIU), which is a UK-based economic intelligence provider. The EIU suggest that the price for apparel (Merino-type) wools will average AU$12.32 for 2011/12 (2.6% higher than the equivalent ABARES forecast), and remain above AU$10 per kg out to the end of 2013. If this is the case, then we should expect the wool price will return toward the trend line shown above for the period since July 2001.

It is interesting to note that the EIU appear to have altered their view as to the importance of the cotton price in dictating the price of wool, where last year their forecast was that the wool price would drop rapidly in line with falls in the price of cotton. In their most recent report, they note that while “…some switch away from wool [from cotton] is possible, ...any change will be marginal, since for many end-uses cotton and wool do not compete”.

Who to target when seeking to grow demand for expensive, rare natural fibres (such as wool)
A perennial discussion among industry strategy-minded wool ‘folk’ is whether the wool industry should focus demand-side investment on the luxury end of the consumption spectrum, or on the lower cost, high volume end. Accordingly, you may be interested in the high level results of a recently completed study of global demographic trends as applies to consumption of clothing and footwear within the largest 61 economies in the world, conducted by the renowned Global Demographics Limited team of Clint Laurent, and funded by AWI.

The following chart shows US dollar per capita expenditure on clothing and footwear by consumers around the globe, where consumers have been split into 5 segments based on their annual average spend. For example, the top expenditure category spends more than US$1,200 per annum on clothing and footwear.

From this study, a couple of points to note:

  • 5% of the population (around 280 million people) invest more than US$1,200 per annum of clothing and footwear – these well-heeled (or highly leveraged!) individuals average an spend of around US$2,300 per capita per year on clothing and footwear, or 38% of all money spent on clothing and footwear purchases. Over the next 10 years, their expenditure is forecast to grow by 39%, from $643 billion to $894 billion.
  • The second segment, an additional 3% of the population or 168 million individuals, represent 12% of all clothing and footwear expenditure, and their expenditure is forecast to grow by 30% over the coming decade.
  • Together, these top two segments represent 50% of all consumer investment in clothing and footwear, while representing only 8% of the population.
  • In terms of regionality, it should come as no surprise that these consumers are preferentially located in our traditional wealthy, high northern latitude markets – North America (USA and Canada), Western Europe (Italy, France, Germany, UK etc), and in Japan. Rapid growth markets for these consumers include China and Russia.

Such considerations are important for targeting of investment, especially when one considers that growers only receive around 2-6% of the retail price of each kilogram of retailed wool apparel, and that long-term, the retail value of each kilogram of wool will need to rise if growers should expect to be paid more per kilogram of wool they produce.