Monthly Market Reports

September 2012

25 September 2012

This month, we look at both the short term impact of the slowdown in China and the future prospects for our wool industry. We will also cover global wool and cotton production for the new season.

Slowdown in China

The subdued exports and slowdown in domestic retail sales are impacting on China’s wool textile industry. Raw wool demand slowed down in the first seven months of 2012, with imports dropping 6.9% year-on-year. Zhangjiagang and Jiangyin registered a drop in wool imports of 9.8% and 17% respectively. These two areas account for roughly half of China’s raw wool imports. Customs data shows that wool top exports from these two regions have decreased by 45% and 44% respectively in the January to July period. Mixed comments were received about the stock level in the area, it is hard to tell the exact stock situation as Chinese processors tend to keep this information close to their heart.

Looking at the retail sectors as a whole, retail sales rose 14.1% to reach 1.31 trn RMB between January and August. According to the Chinese National Bureau of Statistics, retail growth in China has been slow since December last year, with clothing sales rising 20.2% in June 2012 compared to 26.7% in December 2011, total retail growth fell from 18.1% December to 13.7% in June.

Given the global economic prospects and the slowdown in domestic consumption, raw wool demand will continue to be constrained for the remaining of 2012.

However, the medium to long term...

As China’s export driven model is facing increasing pressure from the global economic downturn, especially in Western Europe, the Chinese government aims to boost domestic consumption to balance its economy. The plan, which was released on the 10th of September aims to create 130 million new jobs by 2015, with 5 million job opportunities added every year.

The graph above shows there is still plenty of room to grow for China’s personal consumption. Looking forward, personal consumption as a portion of GDP is set to grow from 35% to 39%. This is compared to USA and Australia’s personal consumption as a percentage of GDP at 70% and 56% respectively, it is forecast to remain at these levels for the next 5 years.

The slowdown in China’s growth rate will go hand in hand with a shift in the composition of demand away from over reliance on investments and exports, moving towards personal consumption. The high wage increases in China’s workforce will continue to underpin personal consumption. A gradual strengthening of the RMB is likely to be part of this change, even as China’s trade and current account surpluses shrink, contributing to an unwinding of global imbalances.

Despite the short term concerns, there are strong medium/long term growth to come from China, supported by fundamental social trends such as ‘the urge to splurge’, brand/logo obsession, and the trading up phenomenon. At this stage China is on track for a soft landing, and it is in the best interest of the Australian wool industry for China to avoid a hard landing.

Wool production for 2012/13

The Australian Wool Production Forecast Committee (AWPFC) has revised down slightly its final 2011/12 estimate from 345 mkgs to 342 mkgs and its 2012/13 production forecast from 350 mkgs to 345 mkgs. The downward revision in Australian wool production was largely based on lower final sheep numbers as reported by the Australian Bureau of Statistics (ABS) in June 2012.

A report released by Economic Intelligent Unit (EIU) shows a decrease in global wool production for 2012/13, mainly driven by alternative land use. In New Zealand the long term decline in sheep numbers has yet to be reversed, despite relatively good returns to farmers. There has been an increased number of farmers moving into dairy and increasing their sheep slaughtering to meet the growing demand for sheep meat. In Argentina, farmers are switching to food crop production, increasing the area of land for arable farming. Over in South Africa, growers are looking to increase sheep numbers after the outbreak of diseases, albeit slowly due to predator issues.

Cotton production for 2012/13

The latest report released by International Cotton Advisory Committee (ICAC) shows mill use of cotton will continue to erode as a result of the Chinese government enforcing a minimum price and a sliding scale tariff. The loss in mill use of cotton in China is being offset by rising polyester and rayon use, resulting in a rapid decline in cotton’s market share, however, other large countries’ mill use is rising or holding.

The continued rise in prices of grain and oilseeds will reduce cotton area in the southern hemisphere. World cotton production for 2012/13 is two million tons greater than consumption, ending stocks are forecast to rise to nearly 16 million tons by July 31 2013. The ratio of ending stocks to use outside China is forecast to rise to 0.62, the highest since 1965.66, when it was the US, not China that was operating a de facto world cotton buffer stock in an effort to support domestic farmers.