Monthly Market Reports

December 2012

20 December 2012

The Australian wool market has finished the year on a good note – at 1072 AU c/kg, or USD1132, and with very positive movement in forward wool market for 2013 maturity. With this in mind, our final newsletter for 2012 acknowledges the foundations from which much of the current market fundamentals derive, and draws parallels with other markets ‘in development’ for our wool.

40 years on and still growing strong

2012 marks the 40th anniversary of the establishment of diplomatic relations between the Peoples Republic of China and Australia – an anniversary celebrated formally last week at a dinner hosted by Prime Minister Gillard in Canberra. The Australian wool industry was well represented – which seems appropriate given what has been achieved by our respective wool industries since Gough Whitlam visited Beijing in 1971. In fact, Whitlam’s initiative came seven years after Bill Gunn, then Chairman of IWS and AWC, lead the first wool trade delegation to China in 1964.

We start by considering the status of our relationship today, in volume terms. The following chart shows the growth in China’s share of Australian wool exports since 1988, and our share of Chinese wool imports over the same period. The rapid growth in our bilateral wool trade is obvious, as is the current very high level of inter-dependence achieved – whereby China accounts for about 70 per cent of Australia’s wool exports, and Australia accounts for around 70 per cent of China’s wool imports. In truth, our futures are entwined, or perhaps more appropriately, ‘plied’.

Less widely appreciated, or celebrated, is the important role Australia’s wool industry has taken in fostering the development of China’s wool processing industry. The reality is that Australia’s wool industry was very quick to capitalise on the opening of bilateral ties from 1972, and in the decade that followed, commenced a strategic investment program to assist with technical up-skilling, and to encourage their consumption of Australian wool. The first official technical delegation from Australia arrived in China in 1978, the year Deng Xiaoping’s Open Door Policy came into effect.

Some of the personalities involved on-the-ground on behalf of Australia’s industry include Tom Drummond, Robert Wang, Stuart Ascough and late G.H. (Howard) Michell, who was Chair of GH Michell through this period and was involved in a number of the early wool trade delegations to China. Another key player was Barry White, who from 1988 led the AWC’s and later AWRAP’s international market development program, which included China and Russia as target regions. Others, such as IWS’s Percy Lee and Jimmy Jackson (now GM of Product Development and Commercialisation at AWI), were despatched from Ilkley, UK from the early 1980’s to assist on downstream processing. Diplomats such as John Sheung played important roles, when much of China’s industry was centrally controlled.

This market development program has been an outstanding success, even if only measured in terms of the growth in our bilateral wool trade. However, the real fruits of this program for Australia’s wool growers are perhaps only now starting to accrue, with the emergence of China as an affluent domestic consumption market, and with the emergence of indigenous Chinese apparel brands. China is now the second largest luxury consumer market in the world after the US; 1 in 4 luxury product consumers are now Chinese, who also account for 50 per cent of greater-Asia’s luxury consumption, and 30 per cent of European luxury purchasesi.

Perhaps more important is the dramatic growth of the middle class in China – the current (12th) Five Year Plan envisages a 500 million strong Chinese middle class by 2017. The ‘Western Development Program’ component of this Plan aims to increase income and consumption in 2nd and 3rd tier cities in China, and close the income gap between the East coast cities and the rest of China. This will have enormous effect on the domestic apparel market and the demand for high quality apparel wool – representing a further evolution in the relationship between our respective wool industries.

Some parallels

While on the subject of anniversaries and market development efforts:

  • 2013 marks the 40th anniversary of diplomatic relations between Australia and Vietnam, where currently AWI is engaged in provision of training and support the establishment of wool processing expertise and capacity (critically important as China’s wage costs escalate). After China, Vietnam is the 2nd largest supplier of apparel to the US market, and has preferential trade arrangements with EU and Japan – thus the majority of our key wool apparel consumer markets.
  • On the 26th of December, it will be 21 years since Australia formally recognised Russia after the dissolution of the USSR – the collapse of which contributed substantially to the demise of the Reserve Price Scheme. 21 years later, Russia is emerging as an important luxury apparel market in its own right, and the former Soviet republics of Belarus and Ukraine are emerging as prospectively important wool processing hubs for Australian wool, located on the doorsteps of Western Europe and Russia. Earlier this year, AWI arranged a successful trade delegation to Belarus, Ukraine and Russia, and already there are some very positive reports (e.g. containers of Australian wool moving) from the wool exporters who accompanied AWI staff. Watch this space as momentum builds.

So, as we finish the year on a high wool market note and with some notable anniversaries, we wish you all well for 2013!

Paul Swan and Allan Wang

i Bain and Company (2012), “Luxury Goods Worldwide Market Study” (11th Edition), Milan, 15th October 2012