Monthly Market Reports

July 2011

1 August 2011

In this edition of the Market Intelligence report, we will cover both demand and supply-side issues.

2010/11 Production Wrap

In March, the Production Forecasting Committee’s first 2011/12 production forecast was released, envisaging a 345 m kg greasy clip, up by 5 m kg from 340 m kg for the previous year. In the coming weeks, the AWI Wool Production Forecasting process for July will be completed, finalising the production estimates for 2010/11, and producing the second forecast for 2011/12.

With tight supply being one of the key drivers of the current excellent prices being received by growers, there is much trade interest in the revised wool supply forecasts for the coming year – particularly how quickly production is recovering, and how this will differ between diameter bands. Given this, it is worth reviewing how 2010/11 wool test volumes (highly correlated with auction offerings) differed for different diameter bands, especially since we saw much wool released onto the market from stocks.

Figures 1 and 2 compare the production trend for our Super and Ultrafine Merino types (<17.6 microns) and as well as Medium and Strong Merino types. These types tend to end up in very different garment markets; sub-17.6 micron tending to be converted to lightweight, pure Merino products destined for luxury product s, while the 22.6-24.5 micron wools tend to be used in mass-market suits and knitwear, often blended with cheaper synthetic fibres such as acrylic (knits) and polyester (knits and wovens).

Figure 1: AWTA greasy wool test volumes for sub-17.6 micron wool.

Figure 2: AWTA greasy wool test volumes for 22.6-24.5 micron wool.

The wool testing trends are very different: sub-17.6 micron test volumes were down 25% year-on-year, whereas Strong Merino volumes increased by 20% year-on-year. AWI’s expectations for 2011/12 are:

  • Strong Merino and non-apparel type wool production will again increase significantly, year-on-year;
  • Production of Fine and Fine-Medium Merino will increase on the back of greater retention of older ewes for joining, and young replacement ewes in the eastern states.
  • Production of our finest Merino categories will again be very tight.

Competitor fibre prices

There has been a lot of focus on recent reductions in the price of cotton from highs reached in February and March this year, and it is worth putting these price changes in context. Figure 3 shows the prices, as at end-June 2011, for the major competitor fibre prices for mid-micron Merino wools.

Figure 3: Wool and Competitor fibre prices to end-June 2011.

Note that cotton prices are still well above historical values, and that oil-derived synthetic prices remain high.

Importantly, although the price of cotton has declined, its’ ratio against the price of wool has returned to ‘normal’ values since the decline of the wool stockpile (20 micron wool is normally around 5 times the price of cotton).

The bottom line? Our view remains unchanged that the outlook for 2011/12 is for wool prices to remain strong overall, although prices for the coarser types will come under pressure if production volumes increase again year-on-year, as expected.