AUSTRALIA’S wool market could be hit hard in coming weeks by a growing cash flow, bale dumping and shipment crisis.
Global shipping disruptions and COVID lockdowns in China major population centres like Shanghai, and in ports and wool processing areas are delaying raw and processed wool deliveries.
The China COVID lockdowns are also preventing the courier delivery of shipment documents needed for banks to process mill payments to exporters.
Exporters are facing regular delays in receiving Letter of Credits because of the courier issues, and bank or office closures due to COVID outbreaks and lockdowns, limiting their ability to buy at Australian auctions.
The global shipping issues have meant Australia’s major wool dumps are overloaded and unable to receive more bales for dumping for up to seven weeks after auctions, further delaying payments to exporters.
These issues have already generally depressed auction prices in the Australian auction market, according to Australian Council of Wool Exporters and Processors president Josh Lamb, but now there are concerns the situation could worsen without action.
He said some Merino wool is now selling for less than it would be under normal market conditions because of the supply chain and finance issues.
“There is no doubt the market should have been in a better place over the last four weeks than where it is now.”
Mr Lamb said with the South African market difficulties due to the Foot and Mouth Disease outbreak, “there is every reason for Australia to be higher, but it’s not.”
“Why isn’t it? It’s because exporters’ finances are stretched to breaking point.
“The industry has enough money generally, the issue is the timing of it at the moment,” he said.
“Banks financing exporters have been very supportive over the last 18 months, but it’s not being all put together at the one time in the sale room.”
Mr Lamb hesitated to state that the trading and shipping difficulties could lead to a market drop.
“It will affect the market over the next month, there is no way it can’t.”
He said exporters have been advising brokers for months about the supply chain and finance problems, but only a few have acted on calls for extending prompts.
Mr Lamb said recent market reports have talked only about how well the market is doing when the background to current auction prices is a different story.
“So why would growers or brokers worry?”
He said exporters will be in constant dialogue with brokers to seek some relief over the next three to six months.
“Realistically, these logistics problems with these lockdowns in China have put everything (recovery) back another year.
“It might seem an exaggeration, shipping problems were there a month ago, but there was some light at the end of the tunnel albeit maybe for next year, but this lockdown in China with ports closed is going to push the whole supply chain back another 12 months,” he said.
“So now it might be 2024 before we get back to some sort of normalcy — this is not going to solve itself in a couple of months.”
Last week there was a lockdown in the Zhanjiagang area where the major Merino fleece processing mills are based. Yesterday a smaller processing province, Kunshan, went into lockdown.
“All these provinces where the woollen mills are located are going in and out of lockdowns on a weekly basis.”
Mr Lamb said the situation with Australia’s wool dumpers is at a crisis point, because they can’t accept wool for seven weeks after purchase, meaning its shipment to buyers and thus payments to an exporter is delayed.
“Normally pre-COVID that was probably 10-15 days, and we as exporters are having to fund that whole gap and this is where the problems lie.”
Market may not be able to cope – Morris
In an email to brokers on Thursday, Western Australian exporter PJ Morris Wools managing director Peter Morris said the industry is at a crossroad again two years after the COVID pandemic first led to a reduction in auction offerings with the support of growers, brokers, exporters and end consumers.
He said China is currently importing 80 percent of Australia’s wool and the Zhanjiagang area takes about 50-60pc of the volume.
“Comments from our contacts in China are that small to medium size mills will come under more financial pressure from the start of May as they will not be able to repay loans on time and purchase more wool until debts are cleared.”
He said space on vessels and limitations on volumes of containers that shipping companies are willing to take to India are limited due to the slow logistics and port congestion in many Indian ports.
Into Europe, bookings on vessels take up to six weeks to two months from booking date and are regularly delayed, Mr Morris said.
He said the Melbourne wool dumps are all full and cannot receive wool for shipments that are sailing prior to the last week of May.
“This is the worst situation we have seen to date.”
He said the Adelaide centres face regular delays due to transport issues, and in Sydney, multiple shipping delays mean exporters are regularly unable to ship consignments for up to four weeks after payment of wool. In Fremantle, massive congestion due to 1 Wool Dump and multiple vessel omissions this season has reduced vessel slots and volume of containers being shipped.
“All ports are suffering from overloaded container yards where containers are stacked for delivery to wharf.
“Delays in vessels are just compounding the congestion in container yards alike,” Mr Morris said.
“My concerns are that over the next few weeks of volume in Melbourne in particular, the market will not be able to cope with the current logistical and cash flow situation.
“Our clients are struggling with making payments which will in turn impact Exporters ability to purchase in their normal capacity,” he said.
“There will be weeks that exporters are limited in cash due to constraints of payments from overseas, normally this is not an issue.”
Mr Morris said auction volumes were spread more evenly and sale sizes were steady around the 40-43,000 bales a week, the market would be stronger on average.
“It would be smart marketing of the wool clip if we had a better spread of wool up until June rather than the lull in May/June as we normally have.
“This is a peculiar season and not like a normal season due to supply chain issues so it seems that season could be extended to assist clients.”
Mr Morris said capacity in certain markets such as Europe and India is at full production and they can’t buy more.
“China is going to struggle with rolling lockdowns you can assume for the rest of this calendar year.”
Mr Morris said growers returns have to be a priority so wool can compete with other farm produce.
“Extending prompts by one week will assist in these logistically difficult times and I suggest brokers look at this from the new season in July 2022 and review next Easter in 2023 as the situation may have improved.”
The National Council of Wool Selling Brokers of Australia’s president Rowan Woods could not be contacted for comment on the market situation.
It is important that growers are aware of the issues – WoolProducers
WoolProducers Australia chief executive officer Jo Hall said the current issues surrounding the logistics of shipping wool and associated financial implications for the entire industry are extremely concerning for wool growers.
“In saying that, these are issues that are currently being faced by all supply chains.
“WoolProducers has been aware of the situation for some time now and initially raised the issue with the federal government in early 2021 through the then Deputy Prime Minister, Michael McCormack’s office and again in February this year through Minister Littleproud’s office, as well as briefing the NFF Trade Committee,” she said.
“Whilst government appeared sympathetic to the issue, there is very little they can actually do about it.”
“We operate in a free market economy and growers must continue to have the ability to sell their wool at the time that best suits their business; however, it is important that growers are aware of the current financial issues facing the industry to make informed decisions on when is the optimal time for them to sell their wool.”
So the take home message is it would be smart and a win; a win for wool growers and buyers, to agree to:
1. Abandon the primeval wool sale halt in May/June and resume regular wool sales.
2. Have more even auction volumes? Say 40-43,000 bales a week.
3. Extend prompts by two weeks while logistics are difficult.
This is a timely article article on the crisis, and it is a crisis, facing the Australian greasy wool industry. And thank you Josh Lamb for being frank with the growers about this very serious situation. I do hope the growers and their brokers respect and appreciate your salutary comments.
The Australian wool industry today has not recovered from the loss of capital along the entire wool pipeline from the collapse of the Reserve Price Scheme (RPS) 30 years ago.
Many trading houses with huge capital resources like Itochu at that time withdrew for the wool market for ever.
Today the main exporters of wool out of Australia, the people we as growers depend on to bid, pay for and ship our wool are small family companies with limited capital resources. It is these buyers who carry the risk of currency movements, of shipping and payment delays, of customers defaulting, of order cancellations and so on. And they are working on very small margins most of the time.
After having some “skin in the game” myself I wonder why on earth these guys keep at it; but thank God for the wool industry, they do.
Today most wool growers have very healthy balance sheets. Can I urge the National Council of Wool Selling Brokers of Australia and their president Rowan Woods to immediately extend payment prompts for all wool sold at auction by a further 14 days at the very minimum, and let us all work with the exporters to manage this crisis.
And also demand leadership on this matter from our wool grower leaders.