Queensland Cotton to boost broking as it departs trading

Terry Sim, August 20, 2014
Mike Avery

Queensland Cotton’s general manager of wool Mike Avery

Mike AveryMike Avery Major Australian wool trader Queensland Cotton will focus on expanding its broking business after its planned withdrawal from exporting. QC’s parent company Olam International last week cited ongoing poor demand for greasy wool and diminished margins in an over-competitive environment for its decision to wind-down trading activities. “We are only vacating the export space down the line,” QC’s general manager of wool Michael Avery said.

Avery positive about wool prices

But he is positive about the wool price-supply situation over the “medium term” and said Olam International will maintain and strengthen its commitment to the Australian wool industry through continued support for its broking network, Western Wool Marketing. “We look to build and expand on our established wool broking arm operating out of Australia’s eastern states,” he said. “We are wanting to use our resources in the wool business to focus more on the broking side. “To bring better service through Western Wool in New South Wales and Western Wool in Victoria is how we want to see the team going forward as one business unit,” he said. “We won’t be using the M&M brand, but all the staff are still there.” Queensland Cotton is maintaining its 40 broking staff in its three Western Wool Marketing stores in New South Wales – at Parkes, Orange and Wagga — and at six depot offices in Victoria – at Melbourne, Ararat, Edenhope, Derrimut, Horsham and Mortlake. “We currently move around 65,000 bales through those depots, though they are not all our own bales. “We handle for Michells in New South Wales and Victoria and they handle for us in South Australia,” he said. “On our own behalf the number would be about 60,000 bales.”

Wool broking offers steady repeatable incomes

Mr Avery said Olam International saw wool broking as a low-capital usage, high overhead business offering steady repeatable incomes that are volume-driven with good service. “You provide good service with the people to deliver that service then you get the volume through the door and you will make a profit.” Olam International was also comfortable with the wool broking network’s “adjacency” with its cotton, pulse and almond businesses within the whole rural landscape, he said. “We can build to a significant position in the broking arm without a massive capital outlay – there are not a lot of fixed assets that you require and it works in geographically with our other businesses – we’ve got 11 cotton gins throughout New South Wales and Queensland.” “I think it is important that we build that presence,” Mr Avery said. “Olam has always built its businesses around the world on these adjacencies, so they are comfortable with wool, cotton, grain adjacencies in Australia.” Mr Avery said he expected to grow the broking business “organically with people rather than with acquisition…but the potential is always there.” “We want to improve on what we do and get more efficient and deliver better service and with that will come growth.”

Margins on greasy wool and wool top trading not acceptable

He said it was disappointing that Queensland Cotton had not been able to derive acceptable margins on its greasy wool or wool top trading. The company had export commitments that required fulfilling and it would maintain all trading and logistic staff in the interim, probably over the next six months, he said. “We’ve had a positive response from our overseas partners, more disappointment than anything, especially on the European side, where we have had a long association with people.” The trading business departure will mean the loss of seven export positions, but the company will re-absorb staff where possible.

Returns on equity needed to be above 10pc continually

Mr Avery said the unforseen drop in demand for greasy wool, particularly from the main trading partner China, has made it extremely difficult for Queensland Cotton’s trading team to achieve a satisfactory return on capital expenditure when compared to Olam’s considerable range of other commodities. “Returns in the rural sector in my opinion have to be, depending on the capital you have invested, north of 10 per cent return on equity continually. “In a wool export business it is a very expensive commodity and at the top end of the market you are looking at containing that capital usage to under $50 million to be in the top three traders,” he said. “So obviously a 10pc return on that equity is $5 million every year and the margins just aren’t there on the wool side to tick those boxes every year. “You can do it one-in-three (years) and one-in-two years sometimes, but consistently hitting that return is very difficult,” Mr Avery said. Export trading is overhead-light and had been a very good mix with the lower-capital people-driven broking business. “(With broking) you are not holding stock, but acting as an agent or trying to add value for the grower,” he said. “So there is no big capital (expenditure) and the returns on broking in a quantum are modest, but quite good.”

Queensland Cotton trading business handled about 150,000 bales annually

Mr Avery said Queensland Cotton was ranked between number two and four among Australian wool exporters in recent years, trading 4-8 per cent of the clip since starting business in 2008 and about 150,000 bales last year. Based on profitability and turnover, the QC wool trading was less than 0.5 percent of Olam International’s total business, he said. Mr Avery believes Australia’s wool market has been through its toughest time, with China taking 20 per cent less wool last fiscal year than in the year before. “We’ve had a decline in the clip and we really have seen prices be fairly stable in the last 12 months with a declining demand. “With where we are with supply, logic would have said that this market should be higher than it is, but it has managed to fight that retraction in global commodities,” he said. “I’m relatively positive about (wool) prices in the next year – I don’t think we are going to have massive swings and I don’t think we will see another further slowdown in China than we had in the last 12 months. “We are going to see less wool than more wool in the coming year,” Mr Avery said. “I don’t think there is anything there to suggest we are going to have a quick turn-around of volumes onto the market.” He doesn’t think the China credit situation, that has hit smaller mills, is going to get any worse. Wool values had also held up relatively well in the face of declining world cotton price, he said.

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