What are the Main Driving Factors for Wool Demand?

Article by: Hari Yellina

Last week, the Australian wool market took on a little softer tone. However, certain superfine kinds, as well as certified sustainable, non-mulesed, or terminated mulesed lots, performed exceptionally well at auction. Faulty Merino and crossbred wools performed poorly in comparison to the others. Overall, the market fell five cents per kilogramme, with sales in Fremantle showing a more pronounced downward trend towards the conclusion of the week. Moreover, wool prices fell 4c/kg in US Dollar terms, but European customers witnessed only a 2c/kg decrease. However, during the selling period, there were some ups and downs.

As global sentiment shifted from one extreme to the other, the currency played havoc with export sales throughout the selling week, with a significant drop over the weekend followed by an equally large surge early in the week. Despite a drop on the first selling day, followed by a recovery on the second, wool prices were basically constant at the end of the auction selling period. Last week, while traditional exporters struggled with cash flow, indent purchasers acting on behalf of Chinese clients filled the gaps neatly. However, their type restrictions put even more pressure on the low-vegetable-matter (VM) sector, resulting in bigger discounts for higher-VM lots.

The wool market was far from the only one to experience wild fluctuations this week. Oil prices plummeted to three-week lows before resuming their upward trend. Fuel dealers in Australia were probably about to return their bowser pricing to pre-war levels when news from Russia shattered hopes of a rapid resolution and drove oil prices back up. Last week’s oil price was still below US$130 per barrel, causing local gasoline and diesel prices to rise above $2.20 per litre. With oil prices spiking by as much as 8% in a single session, it’s difficult to predict where the price will be in the next 24 hours.

When Russia talked about developments on ceasefire negotiations, the most commonly used word in the Russian language, ‘nyet,’ came up again, and darkened the collective atmosphere again later in the week. This came after early hopeful reports. The crisis in Ukraine continues to have an impact on Europe’s wool processing industry, with skyrocketing energy costs being the most immediate effect. The longer the crisis persists, the greater the potential inflationary effect and the lower consumer confidence will be. A surge in prices and an unclear regional future outlook may combine against those discretionary purchases just when the industry was in a positive frame of mind, with workers returning to offices and clothes sales looking optimistic.

There certainly appear to be a few caution flags on the horizon from the cyclical nature of the wool market, with the present “up trend” perhaps running its course, as well as fresh price resistance for superfine Merino – albeit only in some regions. Allowing the inflation genie to escape its box in either America or Europe could be enough to halt economic growth and hence prompt a correction. Medium Merino varieties aren’t suffering any price resistance, and crossbreds are still available at a discount. Assuming there isn’t a global recession, any correction in these categories should be small.