GLOBAL consumer demand and Australian flock trends point to a limiting outlook for wool prices and production, according to NAB’s Wool in Focus report released today.
NAB said after hitting an all-time high around two years ago, Australian wool prices have faced a very tough run recently, with the benchmark AWEX Eastern Market Indicator losing about 46 percent of its value on a monthly average basis since September 2018.
NAB has outlined limited upside for wool prices, predicting the EMI to sit around $10/kg this year and $12/kg in 2021.
NAB agribusiness economist, Phin Ziebell said on the return of auctions after the recess in 2019, the EMI fall to only a fraction above $10/kg.
While a poor price will likely lead to domestic stockpiling, it is hard to see a pick-up in demand fundamentals and a higher A-US dollar exchange rate will be a drag, he said.
NAB’s Wool in Focus report shows how the clear correction in the market in 2019 has been followed this year by additional steep losses as COVID-19 evaporated consumer demand and industrial production.
Mr Ziebell said Chinese buying activity, already falling before COVID-19 hit, has been further impacted by the pandemic.
“Chinese wool and cotton imports were down 43pc and 25pc respectively on a year-on-year basis in June, and with alternative fibre prices subdued, wool will likely remain under pressure.
“While industrial production in China has largely recovered, Chinese consumers remain cautious and forthcoming export demand is uncertain,” Mr Ziebell said.
Sheep producers turning to crossbreds for lamb sales
Australian wool prices have traditionally been quite sensitive to the exchange rate; however, recent movements have been more detached.
NAB forecasts point to an appreciating Australian dollar (A$) against the US dollar, reaching 80 cents by mid-2022. It is also expected that the A$ will appreciate against the Chinese Yuan, albeit more gradually.
“A number of long-term factors, combined with drought conditions in eastern Australia, meant that the rally in wool prices that began around four years ago was not matched by higher production.
“In addition, we’ve seen a move away from mixed farming to cropping only enterprises, and many remaining sheep producers have transitioned to crossbreeds for fat lamb production due to high lamb prices,” Mr Ziebell said.
Can wool apparel sales recover from COVID-19?
Looking at global demand, clothing sales across many major economies have recovered somewhat faster than expected following an initial crash in the first wave of COVID-19. However, it remains to be seen whether the partial recovery can be sustained, especially given the hit to incomes across many economies.
“As the global economy faces its sharpest downturn in decades, a recovery is possible, but increasingly difficult to sustain as the COVID-19 pandemic continues and the ability of consumers to make discretionary purchases reduces,” Mr Ziebell said.
“Furthermore, as people continue to work from home, and we consider the prospects of this trend continuing post-COVID-19, there is the possibility of a structural move away from wool-heavy office attire.”
International textile consult Jimmy Jackson said the trend away from business suiting started before the COVID-19 pandemic, although Australian sales have been doing quite well, mainly due to the popularity of horse racing events.
“You don’t need a suit to go to work anymore.
“Australia is a casual country but we do like to dress up for special events.”
But he said more people working from home need not necessarily mean less people wearing wool, He said many companies have moved into casual wear or ‘separates’ – jackets and trousers – and there were opportunities for wool in “lounge wear” for home-based workers.
With COVID-19 inspired domestic tourism away from crowded places, Mr Jackson said camping and caravanning was booming meaning opportunities for woollen outdoor adventure wear. Snow sports were another big opportunity for wool, he said.
State business banking executive, regional & agribusiness northern NSW, Khan Horne, said while there are a number of factors that need to be considered including demand for wool, uncertainty around COVID-19 and growing global trade tensions, NAB is working with agribusiness customers on a case by case basis.
“NAB is supporting its customers with cash flow and other working capital needs to ensure they come out the other side of this crisis in a strong position,” he said.
Click here to download the Wool in Focus report (PDF).