Chinese and American trade stand-off is good news for wool industry

Terry Sim, May 21, 2018

Wool market analyst Chris Wilcox.

STEPS to avoid a looming trade war between China and the United States were good news for Australia’s wool industry, leading analyst Chris Wilcox said today.

The ABC and other news outlets, including Chinese state media, today reported that the US and China will avoid imposing tariffs and negotiated a wider trade agreement to address trade imbalances.

Mr Wilcox earlier this year and this month sounded a word of caution that a downturn in the current Merino price ‘super-cycle’ could be triggered if a China-US trade war developed.

Australian wool prices soared to new record heights last week, benefiting from strong demand from Chinese, Indian and European processors, in the first synchronised improvement in economic growth around the world since the Global Financial Crisis.

Mr Wilcox has said consumer confidence is at the highest levels seen in the millennium, and in the United States and Europe since the late 1990s. Resolution of the trade disagreements between the US and China would remove one of the potential external triggers of a slide in “this superb wool market,” he said.

On returning from a recent International Wool Testing Organisation conference in Hong Kong, Mr Wilcox, said the reactions of Chinese woollen mills to recent Australian wool price rises included that there have “manageable” reductions in margins through to the retail level and some substitution of wool with other fibres.

“They were rather comfortable with the price levels, as they were two weeks ago, but of course it went up quite a bit last week again.

“Some exporters from Australia are getting a little nervous about the pace of increase in the last couple of weeks, but really not a lot of (resistance to the price levels) at this stage.”

He said other triggers to a ‘super-cycle’ downturn could be rising official interest rates in the US and Europe dampening economic growth or debt levels and credit risk in China.

In late March this year, Mr Wilcox said the announcement by the Trump Administration that the US will impose a 25pc import duty (aka tariff) on US$50-US$60 billion worth of imports from China threatened to start a trade war.

“This would impoverish the economies of all countries, most particularly the US.

“It is very poor timing, given that the US economy is now growing at a healthy clip (fast enough for the US Federal Reserve to again lift interest rates this week) and economic growth in the European Union is picking up,” he said.

“The much stronger economic growth is one of the key reasons for the Merino wool price super-cycle the Australian wool industry is now enjoying.

“A trade war will be bad for the wool market, even if there are no products directly related to wool and wool clothing on the list,” Mr Wilcox said.

“It will slow economic growth in both the US and China (and elsewhere), affecting demand.”

Mr Wilcox also said international currency change effects might also hurt wool.

“While the $A fell on the news of the new import duties, in the longer run the $US is likely to fall against the $A as a result of a trade war between the US and China, pushing up the price paid in $US for Australian wool.

“The announcement of these tariffs on imports from China and the possibility of China retaliating, leading to a trade war, could be the trigger for a downturn in the current Merino price super-cycle,” he said in March.


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