Early auction rally sparks forward market bidding

Mike Avery, Southern Aurora Markets partner, November 15, 2019

BIDDING in the forward wool market began the week ahead of cash into the first quarter of 2020, but failed to excite the sellers with sentiment and rumour suggesting a solid rally.

The rally delivered better forward bidding levels with 19 micron trading to 1810 cents for January and 21 micron to 1760 cents for February and March.

The erratic nature of the spot auction was again at the forefront, with a short-lived rally Wednesday losing steam almost immediately giving up half the gains Thursday.

Considering the 21 micron Index closed the week at 1750 cents, there are few better examples of valuing certainty of return over the fear of lost opportunity than this week. A hedge return of 1760c/kg clean is the equivalent of $2200 per bale (around 1200 c/kg greasy).

Volatility remains the bugbear of everyone along the pipeline. Exporters margins are dwarfed by the magnitude of the daily movements, leading to a conservative just-in-time approach if they are unable  to effectively cover their forward risk. This has the effect of reducing efficiency in the pipeline, disrupting a smooth flow of product and ultimately constricting demand.

Where to from here? Probably more of the same on the forwards. The curve is remaining flat into the first quarter and discounted beyond. We expect buyers to remain keen to cover forward to keep turnover going but exposure at a minimum. Lack of volume in the forwards remains a concern and an impediment to getting better price signals outside of the truncated forward window.

Indicative trading levels for next week

19 micron                          21 micron

November                                                        1785 cents                         1740 cents

December                                                        1785 cents                          1740 cents

January/March                                               1770 cents                         1740 cents

April/June                                                       1720 cents                          1680 cents

Trade summary

January                19 micron            1810 cents                         2.5 tonnes

February              21 micron            1745/1760 cents              25 tonnes

March                  21 micron            1760 cents                           5 tonnes

Total 32.5 tonnes


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