The Hindu Business Line : Firm trend seen in global wool prices

What’s in store
Prices may decline 17% by 2012-13 as wool supply from expanding Australian sheep flock increases.
For 2008-09, uncertainty over US economic growth may lead to a marginal fall in prices.

M.R. Subramani

Chennai, April 1

Global wool prices are forecast to remain firm during 2008-09 (July to June) as the supply-demand situation is expected to be finely balanced.

The rise in wool prices, which began in the second half of 2006, has been caused by uncertainty over the duration of the 2006-07 drought and its effect on wool production and strong export demand, according to Abare, the Australian professionally independent government economic research agency.

However, the prices are projected to decline by 17 per cent to 776 Australian cents a kg of clean wool by 2012-13 as wool supply from expanding Australian sheep flock increases in tune with demand.

Even for 2008-09, possibilities exist for a marginal one per cent fall in prices to 960 Australian cents a kg of clean wool due to uncertainty over US economic growth.

Slower growth could affect demand for finished wool products, which in turn, could reflect on raw wool purchase by the Chinese.

Chinese imports

“Chinese imports of raw wool from Australia will be affected by expectations of Chinese processors about next year’s US orders for wool products. Any perceptions on the part of the Chinese buyers of softening in US demand for wool apparel and textiles could translate into lower Chinese imports of raw wool, thereby putting downward pressure on Australian wool prices,” Abare said.

While China is the largest importer of raw wool, the US is the largest export market for woollen products.

Demand for raw wool

On the other hand, demand for raw wool has been the highest during the last five years, according to Woolmark Business Survey and the increase in wool prices has resulted in drawing more of on-farm and brokers’ stocks, which had already been low, to the market.

But demand for wool could be softened by higher prices and availability of alternative fibres such as synthetic and cotton.

The ratio of wool prices to synthetic fibre and cotton prices averaged four to one during July-December 2007. This was against a six-year average of 3.5 to one between 2000-01 and 2006-07.

“Past experience suggests that if wool prices relative to synthetic prices remain above this longer term average for an extended period, there is likely to be some substitution of lower cost fibres of wool,” Abare said.

Higher cotton prices, on the other hand, have resulted in wool to cotton prices averaging 5.7 to one between July 2007 and January 2008, down 11 per cent from the preceding six months. This decline was because of stronger increase in cotton prices relative to those of wool in the first half of 2007-08. Since global cotton production is projected to be lower and prices are estimated to be higher, the wool to cotton ratio is expected to decline further. Over the medium-term, the ratio is expected to decline to five to one.

Availability of stocks

Abare said a feature during 2007-08 has been that offerings at the auctions have been principally fresh wool, firmly indicating that stocks are close to being exhausted. Without availability of stocks to buffer production fall, exports of greasy wool declined 15 per cent during July-December 2007 compared with the same period a year ago. For the season as a whole, the exports are projected to fall 23 per cent, Abare said.

During 2007-08, shorn wool production in Australia is expected to be 3,95,000 tonnes, seven per cent lower than the previous year. In view of the drought continuing Down Under last year in the sheep-producing regions, the number of sheep shorn and average fleece weights remained relatively low, leading to higher prices, Abare said.

The high prices have led to a situation, where the industry is heading for a period of expansion. Stronger prices for both wool and meat, combined with expectations of weather conditions improving relative to 2006 and 2007, have promoted producers to hold on to their breeding stock. But it could take years before the expected expansion takes place and increase in Australian wool clip sizes, Abare said.