To Russia with wool

4 April 2012

The Woolmark Company has been investigating new retail and processing markets for Australian wool.

Russia is on The Woolmark Company’s hit list to market Australian Merino wool products and benefits
Russia is on The Woolmark Company’s hit list to market Australian Merino wool products and benefits.

Apart from the obvious benefit of potentially increasing demand for wool products, there is also a risk management element to this strategy. Australia is currently very reliant on China as the major buyer of Australian greasy wool, plus our traditional (western) retail markets continue to be at risk from recession.

Australian woolgrowers will no doubt be familiar with Russia. Prior to 1991 when the USSR broke up, the USSR was the largest buyer of Australian wool. Most of it was used for clothing for high ranking military officials and communist party members. Following the break-up of the USSR, demand fell almost completely away.

Russia is emerging now as a potentially major retail market, due to its increased wealth, large population (143 million) and extreme weather. The Woolmark Company analysis conducted to assess growth opportunities for Australian wool shows the potential for the countries of the former USSR is second only to China.

Russia’s economy is booming, driven by the resources sector. In the past five years, Russia has grown from being the world’s 11th largest economy to be the seventh largest economy.

Russia’s disposable income, or its comparative real purchasing power, is more than countries such as the US, Germany and the UK. Absence of debt and low taxes make Russia’s emerging middle class well positioned for the future. Real per capita disposable income is expected to grow at an average rate of 6.5 per cent per year.

The Woolmark Company general manager of product development and commercialisation Jimmy Jackson and AWI chairman Wal Merriman undertook an investigative visit to Russia last year and Mr Jackson said Australian wool was well placed to make an impact in the country.

“Russians like to buy the best,” Mr Jackson said. “It’s in their heritage from the Tsar’s time. They experienced 74 years where they couldn’t buy anything of quality; but now with growing affluence and a burgeoning middle class, they want some luxury.

“Russians are very knowledgeable and discerning shoppers that study and inspect a lot.

They like to dress up and they are one of the most brand conscious countries in the world.

“Plus Russia is very cold! Moscow’s average temperature is less than 10°c for seven to eight months of the year. So wool’s insulating properties should be in big demand. Coats, scarves, shawls, hats and gloves are all necessities, not accessories.”

As well as new retail markets for Australian wool, The Woolmark Company has also been exploring new processing markets. This is necessary to mitigate too much reliance on a single buyer (China) of Australian wool, and the increased manufacturing costs in China that could result in a downturn in China’s manufacturing base.

“While we are very happy for Australian wool to be in high demand from China processors, three quarters of Australia’s total wool clip is exported there. So it’s prudent to explore other markets and not put too many of our eggs in the one basket, Mr Jackson said.

“Plus, pressure is building on wool processors in China as a result of rapid rises in manufacturing wages, which is partly a reflection of intense competition for access to the tight Chinese skilled labour supply.

“Indeed, the chairman of the Chinese Sunshine Group explained at the recent Nanjing Wool Market Conference how the combination of the 50 per cent rise in raw wool input costs (50 per cent of total fabric costs), and 20 per cent year-on-year wage cost increases, had increased their costs to produce fabric by 35 per cent year-on-year. Some of these costs would have to be passed on to retailers, affecting volume demand.”

The Woolmark Company is liaising with manufacturers in growth processing markets, such as the countries of the former USSR including Russia, the Ukraine, and especially Belarus. Belarus has a low cost textile manufacturing industry with qualified and disciplined personnel, close to the lucrative European (including Russian) retail markets. Many contacts are already established between manufacturers from former USSR countries and Australian wool exporters, and suppliers of part-manufactured products from China, Turkey and Italy.

The Woolmark Company is also investigating opportunities for new processing markets in other regions, such as south-east Asia (such as Vietnam and Cambodia) where The Woolmark Company is putting in place an Out of Vietnam project similar to AWI’s Out of Bangladesh project, and Central and South America, which already has a large textile infrastructure and is close to the lucrative USA retail market.