AUSTRALIAN wool price benchmarks hitting record levels on Wednesday has raised questions about the sustainability of the new auction levels, especially for fine Merino clips.

After the AWEX Eastern Market Indicator hit 1422c/kg clean and the Western Market Indicator hit 1498 cents last week, the EMI this week hit an all-time record high of 1439 cents on Wednesday, before easing off slightly.

Underlying the record EMI and regional indicator peaks of 1393 cents in Melbourne and 1509 cents in Sydney, were fine wool prices that pushed some sub-18.5 micron price categories over 2020 cents, including 2061 cents for the 16.5 micron MPG and 2027 cents for the 17 micron MPG in the north and 2025 cents for the 16.5 micron MPG in the south.

Some market operators are cautiously optimistic about the sustainability of current prices, suggesting the industry is now in a perfect storm of strong demand, low fine wool production and niche product marketing. But one Western district wool grower, prime lamb producer and garment maker Peter Small, recently back from China, is more bullish.

Mr Small believes the AWEX EMI will reach 2000 cents clean by 2020, reiterating a prediction he made in 2010 when the EMI was around 1000 cents; that wool prices would double by the end of the decade.

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Mr Small is chairman of Quality Softwools, owner of garment brand Toorallie Australia, and has just returned from Shanghai after reviewing his brand’s new winter range. He has been growing wool and working with the processing sector since the 1990s.

“I’ve been looking at the industry for some time and seeing the massive amount of new investment in the industry, more recently in China, it’s just massive.”

With this massive investment, two things would have to happen; either wool production has to increase to utilise the increased processing capacity or competition for wool would see inefficient processors squeezed out, he said.

Mr Small said the only thing that will increase wool production is higher prices and he has been told the people newly invested in China’s processing sector are confident they have sufficient efficiencies and profitability to push inefficient processors out of production. The investors in wool scouring, combing, dyeing and top-making had to process wool, he said.

“I actually think both those things are happening and are going to happen.

“I’ve seen this continual decline in wool production and an ongoing increase in investment in new plant and equipment, so something has got to give.”

Mr Small said with prices lifting again Melbourne early this week, the market was on the way to an EMI of 1450 cents.

“I’m not saying there will not be some retractions, any market goes up, down and sideways.”

He also expected there would be some fibre substitution at these price levels, but said the key issue in the market was the price consumers will pay for garments, not the raw wool price.

“The secret to that is if the product is what the consumer wants, I don’t think they care very much whether the greasy wool is priced at 1000 cents or 2000 cents.

“For people to pay the extra price for the garments they are going to demand that the garment performs and gives them the satisfaction they want,” he said.

“Getting the product right means everything from the breeding and the classing right through the pipeline.”

Fine Merino wool growers who stay focussed would be rewarded in meat and fibre returns, Mr Small said. This was already being indicated by the increasing differential in prices between fine and strong Merino wool. In January last year the AWEX Micron Price Guide for 16.5 micron wool was 1564 cents and for 21 microns it was 1399 cents, a difference of 165 cents. On Wednesday, the 16.5 micron MPG in Sydney reached 2061 cents, while the 21 micron MPG was 1485 cents, a difference of 576 cents.

This meant that producers of fine wool and the better Merino wool were starting to be rewarded, he said.

Wool’s value to be examined at higher prices

KareeWool owner-operator and former trading manager for H. Dawson, Alister Carr, said if the market maintained these levels it would be amazing, “but we will wait and see I guess.”

“China is a mature market and a lot of the top-making plants can only process wool and up until mid-way through last year the crossbred were doing exceptionally well and I think finally now there is a strong pull-through on the apparel side.

“With all pockets of Australia having a good season the Chinese are clever enough to know that the micron won’t be there this season, the clip’s going broad – that’s probably one of the drivers of why the market has returned 16 microns at nearly 2000 cents and 21s at 1500 cents — so there is a big disparity.”

Mr Carr said with many Merino producers destocking due to drought last year, the sheep numbers are as low as they have ever been.

“Therefore with a lack of wool supply coming through, it doesn’t take much of an improvement in demand to cause this sort of a price reaction.”

Mr Carr said he hoped Mr Small was right and the price rises were sustainable, but the wool industry is driven by fashion.

If wool prices lift very sharply like they have, and it became difficult to pass these onto consumers, later stage processors and manufacturers might start looking at wool’s value relative to other natural and man-made fibres, he said.

Wool top makers look at value when Merino wool prices get very high and might consider processing more crossbred wool instead, Mr Carr said.

“All they are looking at are their margins, but if this is real and I certainly I hope it is, for the sake of the wool growers, then yes, higher trading ranges could be sustainable if the consumer is prepared to keep on buying the wool products that are pulling this sort of reaction through the system.

“That’s the exciting bit – hopefully it is real,” he said.

“if those prices (fine wool around 2000 cents a kilogram clean) are able to be absorbed and it is profitable all along the pipeline, including for the wool grower, then we’ve got an extremely healthy and prosperous next few years in front of us.

“It’s as healthy as I’ve seen it since 1991 … when the floor price was abolished,” Mr Carr said.

“Sheep numbers are at a level where there is no over-production, there is very little stock in the pipeline and there are some incredible end garments being made out of Merino wool, so it’s great.

“The other good thing to add to that is that growers have had a good season and they’ve got a degree of drought-proofing for the next 12 months with the amount of hay and grain around.”

But Mr Carr said for the EMI to get 2000 cents clean it would have to break through a lot of “value barriers”.

“To have a healthy industry we want sustainable long-term prices, not up one year and down the next, so I would prefer it to hand where it is now rather than have it go too silly.”

Fine wool now in vogue in China

Techwool Trading export manager Josh Lamb said fleece wool finer than 15.5 micron “well and truly“ went through the 2000-cent level this week and 16.5 micron pieces also gave it “a nudge”.

“You can see over the last 3-4 years production is continuing to slide and you can see not only the investment in machinery, but also the demand for wool products in general, has definitely been steadily rising.

“So you’ve definitely got a bit of a perfect storm now.”

Mr Lamb said 18 months ago wool demand and supply were evenly balanced.

“Now it has obviously tipped past that because it has really becoming a supply issue now, especially since post-Christmas on fine wools.

“It is being supported by pretty genuine demand behind it; Europe is starting to buy a bit more, they sort of missed a bit of the market before Christmas for the last couple of months and India is starting to buy as well.

“The demand is definitely there but supply is just running the race a little bit at the moment on fine wools.”

Mr Lamb believed demand has genuinely switched around to fine wools, from crossbreds.

“They are not going to support a market on these levels just purely because we’ve been telling them for the last four or five years that fine wools are disappearing and all of a sudden that has come home to roost this year.

“Because if you go back to April-May last year, you could not give 16.5 and 17.5 micron wool away to China; you just could not even get a price for weeks and weeks at a time,” he said.

“Definitely demand has shifted, sometime in the middle of last year or early in this wool-selling season and fine wools are definitely back in vogue in China again.

“Whether that cloth is staying locally or being re-exported into Europe I’m not really sure, but demand has definitely swung around and that’s collided with below-par supply.”

Mr Lamb said the current prices were “real” but possibly not sustainable “just at the moment”.

“There is definitely panic-buying in the market and that’s not China, it is Europe as well.

“So, is it real? Yes. Is there genuine demand behind it? Of course, there is, but just the way the market has gone these last two selling weeks, there is probably just a little bit too much panic there on fine wools,” he said.

“But having said that, quantities are already starting to drop off on the four-week forecast for AWEX further out into February and you would have to think there is not going to be any more fine wools available as we go along.

“It might hang around short to medium term, but we would probably need a bit more commercially-sound reasons to be buying that wool at those levels for it to be sustained longer term,” Mr Lamb said.

“No matter how you look at it going forward, the wool market’s very healthy and it will be, give or take a little bit, on these levels for the next year or two I would say, at least.

“I think people really have to start to look at the market now and say, this could be the next era, as far as these levels go, over the next three or four years.”

Mr Lamb didn’t think wool supply would go up quickly, even by 10 percent, in the next few years.

“My theory is the wool market could probably handle another 10 percent increase in supply, considering the majority of that is probably going to be medium wools, and I don’t think it would knock prices around that much.

“So if you look at it that way and demand is definitely there for it, then you’ve got to say this market is up and down on these levels, maybe 5-8 percent, and is probably going to be here for at least the short term and possibly into the medium term, the next 4-5 years.”

Chinese industry restocking was expected

National Council of Wool Selling Brokers of Australia chief executive Chris Nixon said he had expected prices to “break out” from the 1200-cent EMI level.

“And I thought it was going to be on the upside, because the Chinese last year just ran their wool purchases down enormously and I figured they would have to start restocking, and I think that’s what’s been happening.”

Mr Wilcox said there was a clear stocking cycle to the Chinese industry and processors had to restock at the end of 2016 and start of 2017.

“It seems to fit in with the stocking cycle that the Chinese have, supported by some better purchases out of Europe as well, they’ve been pretty solid – so we’ve got the combination.”

Interestingly, Mr Wilcox said the recent demand lift was occurring within a different world fibre price context than when wool prices last peaked to similar levels in 2011.

“Because back in 2011, cotton prices went through the roof and that pushed up polyester and other fibre prices, and wool prices went with it.

“This time round, you look at the cotton and polyester prices, they are barely moving,” he said.

“This time round it is wool on its own and has been for a few months, which is very interesting and encouraging I reckon.”

Mr Wilcox said he believed that the nexus between wool and cotton or other prices has been broken or changed.

“I think that has got a lot to do with two things, one is the supply side; supply is more limited, and then on the other side, the demand side; I think there has been some positive fundamental changes on the demand side that is helping wool as well.”