LIGHT trading in the wool forward markets this week reflected the uncertainty that surrounds the industry landscape on all levels, but the balance of supply and demand will ultimately decide the outcome.
Demand creation and steady supply has seen the spot market rise to set new highs over the last two years, but the ability of the pipeline to sustain these rises continues to be questioned.
At some point high prices will cause demand destruction, shifting the balance in the market. The forward markets have wrongly indicated this for much of the last two years, trading at a discount to the spot market and anticipating a price driven correction.
The current retraction in the spot market of around 100 cents is in line with the previous seven pull-backs over this two-year period. The questions are does the market need to come back further to meet the expectations of downstream processors and consumers, or will tight supply due to the sustained drought conditions halt the downward trend?
Forward market levels for October and November indicate exporters’ willingness to cover some of their risk at close to spot levels. The 21 micron index is bid at 2150c/kg, about 1 percent under the spot market. The 19 micron index for the same period at 2260 cents is about 4pc under cash.
Light volume on the sell side from growers can be partly attributed to fatigue bought about by the significant discounts the forwards have delivered over the last two years. The moderate discounts and the outright level should now be the focus. Valuing price certainty for part of the next clip, particularly during these tough times, should be a strategy worth considering.
October 19 micron 2320 cents 2 tonnes
November 21 micron 2165 cents 5 tonnes
Projected forward trading levels for next week
Month 19 micron c/kg 21 micron c/kg
Oct 2280 cents 2150 cents
Nov 2260 cents 2150 cents
Dec 2200 cents 2100 cents
Jan 2170 cents 2100 cents
Feb 2140 cents 2100 cents
May/June 2120 cents 2020 cents
July/Dec 2100 cents 2000 cents
Source: Southern Aurora Markets.