Monthly Market Reports

September 2011

3 October 2011

Against a backdrop of dramatic turmoil in world economic markets and remarkable gyrations being performed by the Australian dollar against the greenback, this edition of the Market Intelligence Report focuses on some price-related insights.

ABARES release their price outlook

On 20th September, ABARES released their Quarter 1 (September) 2011 Australian Commodities, which includes a section on the outlook for wool. The full document and statistical tables are available from the ABARES website (, and the key points are:

  • The EMI is expected to average around AU$12.00 for the financial year 2011/12 - which while representing a 6% increase year-on-year and extremely strong in a historical sense, implies some further marginal softening of price from present levels.
  • Supplies of Australian wool are likely to increase by around 3% year-on-year, but declining production by competitor supplier nations means that global supplies will remain tight.
  • Despite the uncertainty on global financial markets, demand for wool is expected to be marginally stronger over FY1112.

News from the international tradeshows

  1. Nanjing Wool Market Conference - this is an annual wool trade conference attracting 500-600 representatives of both the Chinese industry and the major supplier nations. The 2011 Conference was held 6-8th September, and was notable for 2 reasons:
    1. AWI sponsored the Conference for the first time, as part of a strong Australian presence, and;
    2. Conference discussions were almost entirely focussed on which direction wool price would go in the short term - so much so that our attempts to have some discussion about demand-side issues were frustrated.  Nonetheless, much business was written during the 3 days of the conference (estimates of up to 1,800 tonnes).
    Chinese attendees expressed much concern about wool price rises - which have risen 50% year-on-year. This input cost impact has been compounded by the rapid wage inflation affecting all of China’s manufacturing industries.  As an example, the Chairman of Sunshine Group explained how the combination of the 50% rise in raw wool input costs (50% of total fabric costs), and 20% year-on-year wage cost increases, had increased their costs to produce fabric by 35% year-on-year - some of these costs would have to be passed on to retailers, affecting volume demand. This fits well with comments in the latest PCI Fibres Report (Sept 11), that the clothing CPI in China was up 2.2% in August, and that apparel makers are looking to pass on costs increases of up to 18% for Winter garments.
  2. SpinExpo Shanghai - reports from attendees were that SpinExpo was generally subdued, although there were some very bright spots, including the extremely positive response to AWI’s displays. The general feedback is that the top European processors are content with the current market and current prices (e.g. for fine, weaving type yarns), whereas there was much uncertainty and gloom in the lower cost woollen-spun yarn sector (e.g. supplying the lower cost sweaters market).

Pressure building for relocation of come of China’s wool manufacturing sector

As mentioned earlier, 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. This is an inevitable consequence of the rapid growth in affluence, from which we are all benefitting, but also the impact of a long-term policy to restrict birth rates.

The following chart graphically illustrates the challenge being faced by the Chinese industry, comparing the historical and forecast trends in manufacturing wages in China to that for some potential alternative suppliers of wool processing capacity. The percentage figures shown are the forecast average annual increase in labour costs for the forecast period (dotted lines).

The implications of these trends are profound for the Chinese industry, which in a real sense is the major ‘hub’ of the global apparel wool processing industry:

  • Substantial improvements in production efficiency, technical innovation, and staff technical skill development by wool processors and garment manufacturers will be required to preserve price competitiveness, as foreshadowed in the recently released 12th Chinese 5-Year Plan;
  • We should expect to see relocation of manufacturing capacity, especially knitting, from higher wage cost areas in eastern China to central and western regions, and from China to lower wage cost countries, such as Vietnam. The fact that Vietnam has a free trade agreement with the USA and Bangladesh has an equivalent agreement with the EU adds impetus to this potential cross-border capacity change.