INDUSTRY concerns of a growing Australian wool stockpile and ongoing financing issues are being tempered by reports of Chinese mills coming back online amid the growing coronavirus or Covid-19 outbreak.
Trade enquiries indicate there could be about 400,000 bales of wool held in stores across the nation, exacerbated by high pass-in rates at recent auctions and of clip withdrawals from catalogues, although part of an historically low drought-affected national wool clip.
A Wool Industries Australia delegation told a Federal Government roundtable earlier this month that 30-50 percent of wool at auction has recently been withdrawn prior to sale or passed in at auction by growers.
Brokers are also reportedly advising clients to hold wool for sale in March, banking on prices rising if the coronavirus situation improves, although these clips are set to be joined by increased quantities of newly-shorn wool at a time of traditionally lower greasy wool demand from China.
AWH is Australia’s biggest wool handler and its chief executive officer David Mitchell said the company was holding 40-50 percent more wool nationally than at this time last year, including wool received and not tested, tested but not offered, scheduled for sale and passed-in or withdrawn for later resale.
“As a rule of thumb, we are certainly holding a lot more wool than we were this time last year.
“It would be a fair observation to suggest that that would be fairly representative of the national clip.”
National Council of Wool Selling Brokers of Australia executive director Chris Wilcox said China’s Nanjing Wool Market advised on Thursday that the only factories allowed to resume operations are those producing items to help combat the epidemic, such as face masks, sanitizer and protective clothing.
“The rest, including wool textile mills, will not resume until 17 February or 24 February,” he said.
Some Chinese processors starting to come back
However, Endeavour Wool Exports’ trading manager Josh Lamb believed the Australian market was holding because some processors are buying on the basis of greasy wool commitments for tops sold before Chinese New Year.
“So at the moment, it is not a huge issue, because they are covering old sales at good levels and that’s why the market is holding … the issue is how long that can go on and then on top of that you’ve got things like finance, stockpiles and the economic slowdown in China.”
He said some Chinese wool processors were starting to come back online, though finance is the “biggest cloud on the horizon.”
“Mills are starting to talk about having some sort of workforce back at work by the middle of next week.
“So it is starting to turn,” he said.
“It certainly seems that they are all starting to get back to work as best they can and in most cases they are at least getting skeleton staff levels back into mills and offices.”
But Mr Lamb said mills are subject to strict restrictions, including lockdown of 2-4 weeks if a staff member comes down with the coronavirus.
Mr Lamb said there was style premium in the Australian market on Tuesday with the Tasmanian Merino offering, but has generally held its ground this week as it adapted to shipping and Chinese order financing issues.
“Even if mills come back to work immediately there is still going to be a two to three week period for finance to start to flow back to exporters.
“Even if the market turned around and clients were willing to go back into the market again, you are still going to see that finance issue play out over the next two to three weeks,” he said.
“But as far as shipments go, there aren’t a lot of vessels shipping from Australia to China for the next two to three weeks, which is normal coming out of Chinese New Year, there is always a couple of blank (cancelled) sailings.
“So exporters are having to hold wool a couple of weeks longer than they normally would and that is also adding to the credit restrictions at the moment.”
Mr Lamb said traditionally some of the biggest national offerings of wool occur in February, with clearance rates of better than 90pc a year ago.
“We are not seeing that at the moment and the drought is obviously playing a role in that, but it is also pretty clear that wool is not coming onto the market, with passed-in rates yesterday of around 30pc.
“If we are passing in 20-30pc of the offering every week, the stockpile is naturally going to grow anyway,” he said.
Mr Lamb said the potential economic impacts of the coronavirus could put a ceiling to Australia’s auction market in March and April.
“Mills in other parts of the world (other than China) are doing great business because China is basically out of action temporarily.
“But what that means in six, eight or 10 weeks’ time is that business that China should be selling now and processing in two months’ time, might not be there.
“So there could be a few more dark clouds on the horizon than what they realise; it’s not just a case of all these mills coming back online and away she goes again, because they have all now got holes in their order books for the next two to three months that they would normally be filling at the moment.
“On top of that you’ve got one of the biggest consumer spending periods of the year in China – the Chinese New Year – but no-one has been out of their house for four weeks.”
“The positives are Beijing will want to stimulate the economy and wool may benefit from that and also we are in the middle of a supply shortage.”
“It could be an interesting few months.”
Tariff impacts and lower demand for Australian wool
In his weekly newsletter, Mr Wilcox said China’s wool textile industry in China has also had to deal with the impact of the additional 15pc import tariffs imposed by the US on imports of wool apparel from China in September.
“After a sharp decline in imports of wool clothing from China by the US, this decline continued in October and November.
“The quantity of US imports of wool clothing from China slumped by 44pc year-on-year in October and by a further 34pc in November,” he said.
“The value of imports from China fell by 37pc and 36pc for each month.”
Mr Wilcox said US importers have redirected their sourcing to other countries, with business increasing in volume and value during September to November last year out of Italy, Vietnam and India, partly offsetting the decline in imports from China.
“Even so, as China accounts for around half of US imports of wool clothing, total quantity of imports of wool clothing from all sources by the US fell by 17pc in quantity for the September-November period and by 15pc in value for the three months.”
Mr Wilcox said demand for Australian wool has fallen in the past few months, as shown by the latest data from Australian Bureau of Statistics on exports.
“It shows that the volume of (wool) exports dropped by 14pc in December compared with a year earlier.
“The value of wool exports fell by even more, down by 29pc,” he said.
“Exports to most of the major destinations recorded significant declines for the month, led by China.
“For the first six months of the 2019/20 season, the export volumes were down by 16pc to 116.5 mkg,” Mr Wilcox said.
“The value of exports was down by over a third compared with July-December 2018 at $1.234 billion.
“This is no surprise given the drop in volumes and the much lower wool prices at auction this season to date.”
Long-term market fundamentals remain the same – AWI
Australian Wool Innovation’s general manager for the eastern hemisphere, John Roberts, was in China during the 2003 SARS outbreak and said it is important to not get too carried away with the immediate impact of the stoppage in the supply chain.
He said the fundamentals probably haven’t changed that much in terms of supply and demand.
“There is not a lot of wool in the supply chain and natural fibres particularly wool remain very popular at the consumer level, so the fundamentals are still quite good.”
But he said the Covid-19 outbreak is going to be “a glitch a horrible glitch” for the Australian wool industry, but it had to endure it and think about the longer term.
“I think demand (for wool) is on the increase if anything despite the economic apathy out there, consumer confidence has suffered and retail has suffered, particularly in bricks and mortar.
“Certainly overall demand has dropped, but that said if people were to prioritise what their favourite garments were, most of them would be towards natural fibres and wool would be one of the top ones,” he said.
“We’ve got to brace ourselves for a hell of a dip and growers will want to have a good hard luck at their reserves and when they want to sell their wool and if they have to sell their wool, because with all this stoppage I would imagine the price will come under a lot of downward pressure.
“But that said, this will finish and the fundamentals do remain the same.”