Trade tensions weigh on Australian wool prices

Uncertainties surrounding the trade war between the US and China are weighing on Australian wool prices though a reduction in demand from key Chinese buyers.

Australian Council of Wool Exporters and Processors executive director Peter Morgan told just-style that the Washington-Beijing stand-off has come during other events depressing wool sales.

“Events such as the US-China trade wars, US-India trade disputes, the US-Iran political tensions and the negative rhetoric during the recent G20 meeting” have been disruptive and this obviously “affects global economic confidence,” he says.

“All this affects the demand for wool. We saw this after the global financial crisis in 2008; and again, in the first half of the 2019 calendar year, particularly in June, when there was a lot of negative global talk.”

While Morgan says Australian wool prices have shown signs of recovery in July, the main trajectory this year so far has been downwards. The Australian Wool Exchange (AWEX), Eastern Market Indicator (EMI) closed the week of 21 June selling at AUD17.66 clean wool/kg, down from AUD20.25 in February.

Similar declines in US dollar sales were also recorded as the USD EMI fell to US$12.18 clean wool/kg down from US$14.50 in February. In US dollar terms the EMI has not traded at these levels since October 2017, according to a note from the exchange, which adds: “The ongoing tariff wars, Brexit and the general decline of the global economy is playing a weakening game on almost all commodity and financial markets – and wool and textiles is certainly not immune to those whims.”

Morgan however, says that despite some fluctuations, prices in 2017 and 2018 have been at historically high levels. Despite the latest falls, the 12-month average price for 2018/19 (July to June) was at AUD19.39 (US$13.54) per kilogram and it had been over AUD20 for most of the 2018/19 wool selling season. In contrast, for comparison purposes, the average price in 2008/09 was AUD7.94 per kg, Morgan says.

Obviously, wool is subject to normal supply and demand variations. But, “wool is a discretionary product, whose demand and price is very sensitive to global economic events,” Morgan stresses.

New markets?

When faced with disputes like the US-China dispute, do exporters look for new markets?

“When you say new markets that has to be kept in perspective as there really are two markets,” Morgan explains.

The first one is the people who buy greasy wool from Australia and begin the manufacturing process that leads up to the production of wool products that are bought by consumers. The second market is the consumers who buy the wool products.

Indeed, “it is fair to say that there is always a search for new consumer markets,” he says, adding this work is constantly undertaken by Australian wool grower funded R&D and marketing organisation Australian Wool Innovation, which tries to bring new products to global markets.

“For example you can now buy wool shoes.” He notes that retail brands using Australian wool also look for new markets.: “Seeking new markets is an ongoing process in good and not-so-good times.”

However, even with the fall in prices, there is currently no pressure to respond by increasing the amount of processed wool output from Australia. Only 6.5% of Australian greasy wool is part (early stage) processed in Australia, while most is processed in China, which still buys around 80% of Australia’s wool.

For the Australia wool sector to go down this path, “it is a big investment,” Morgan notes.

 

Courtesy: just style By Poorna Rodrigo.

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