November 15, 2003
By Chris Wilcox, Chief Economist, The Woolmark Co.
Nov. 2003 -- During the past two years raw wool prices have been more volatile than at almost any other time in the past 30 years as the extraordinary combination of very low wool supplies, poor demand conditions and geo-political uncertainty collided.
Wool prices reach 13 year high
In 2003 (up to 3rd October) the price for apparel wool, which is used in clothing, as measured by the bench-mark Australian Eastern Market Indicator (EMI), has averaged 630 USc/kg, up 17 percent on the average of 539 USc/kg for the full 2002 year and the highest annual average since 1990.
However, while the average has been very good, it has masked the significant volatility in wool prices. So far in 2003, the EMI has hit a peak of 697 USc/kg in on 17th January and a low of 556 USc/kg on 23rd May. Between 4th April and 23rd May, the EMI fell 100 USc/kg as demand from China?s wool processors dried up as the full force of concerns about the SARS epidemic hit. Prices have recovered a little since then, but remain fragile.
Wool prices in 2003 have hit the highest levels in US$ terms in 13 years largely because of the extremely low level of wool production and available wool supplies globally. Global raw wool supply is forecast to fall to its lowest level in more than 50 years in the 2003/04 season, reflecting another drop in production in the two major grower countries -- Australia and New Zealand.
? because of low wool supplies ?
Wool production in Australia, by far the world?s largest wool-producing country and the main supplier of apparel wool, is expected to fall to 316 mkg clean in 2003/04, the lowest level since the 1946/47 season. Most of Australia experienced one of the worst droughts on record in 2002 and the first half of 2003, and this is still lingering in the major wool-producing state, New South Wales. This combined with record levels of prices for sheep and lambs for meat to bring a very sharp fall in sheep numbers and wool production in Australia in 2002 and 2003.
High sheepmeat prices and poor weather conditions have also combined to bring a forecast 2-percent decline in wool production in New Zealand, to 168 mkg clean. Wool production is low in most other major wool-producing countries elsewhere in the world due to the high sheep prices encouraging slaughtering for meat and the low wool prices, which prevailed up until 2002. Global wool production for the 2003/04 season is currently forecast at 1,180 mkg clean. This is 40 percent below the all-time peak global production in the 1989/90 season of 1,992 mkg clean, with much of the fall concentrated in the range between 20 to 25 micron.
As well as this low level of production, global stocks of raw wool in the wool-producing countries are now at the lowest levels since at least the mid-1970s. The combination of low production and low stocks mean that after a decade of oversupply, mainly due to the huge stockpile of wool held by Australia, the world is now facing a shortage of wool, particularly of wool in the 20-25 micron range, if demand improves from the current soft levels.
? but retail demand conditions are tough and uncertain ...
However, this 50-year low in global wool supply has come at a time when global demand conditions have been very tough and highly uncertain. Economic conditions, a major driver of demand for wool clothing in the major wool-consuming countries, have been difficult since 2001. Furthermore, consumers around the world remain guarded and vulnerable following the series of shocks, including the terrorist attacks in New York, Bali and elsewhere, the Iraq War and its aftermath, escalating tension in the Middle East and the Korean Peninsula, and the outbreak of SARS in Asia.
Apparel retail sales so far in 2003 have been mixed, though generally subdued, with disappointing sales results in Germany, Japan, South Korea, Italy and France (six of the main consumers of wool clothing at retail). Apparel sales are better in the United States and the United Kingdom, and in China sales have rebounded following the SARS-induced sharp drop in May -- although in all three countries this appears to have come at the cost of lower unit prices, which is putting pressure on both retailers? and their suppliers? margins.
? bringing lower orders in the wool textile industry and squeezing margins.
This overall subdued retail environment has meant that ordering in the wool textile industry remains weak. Even in China, where retail sales appear to have recovered quickly in time for the crucial Fall/Winter 2003 sales period, textile orders are soft and wool mills remain cautious and price sensitive, even more so as the US$ weakens against the currencies of the major wool exporters.
This deflationary, poor order-level environment is squeezing margins throughout the wool textile industry, particularly because raw wool prices have risen.
Textile mills have responded by shifting to other more price competitive fibers, using less wool and more cotton, acrylic and polyester. This has helped push prices for these fibers higher and wool has now become a little more price competitive in the past month.
The situation has been particularly tough for those mills which are committed to wool, notably the wool scourers and combers. Margins in this industry have been very low and even negative over the past 18 months because of intense competition between the mills for raw wool supply, which is well below the total available processing capacity in the world. The industry has begun to rationalize and restructure to adjust its capacity levels to match the lower wool supply levels.
More optimism for 2004
There is more optimism about demand conditions in 2004, as there is mounting, although patchy, evidence that the global economy is on track for a relatively steady recovery in 2004. There has been a steady stream of surprisingly good economic news from Japan, and Korea?s economy is expected to recover in 2004 after hitting the bottom in the second half of 2003. In the United States, the economy is recovering amid concerns about stubbornly high unemployment levels and high personal debt, both of which could hurt consumer spending. In Western Europe, major business sentiment indicators have recently pointed to an improvement in conditions, although consumer confidence remains weak.
This improvement in developed countries will help support demand from China, the largest market for wool clothing at retail, which is expected to see continued strong economic growth and rising incomes.
Fabric fashion trends for Fall-Winter 2004 are favourable for wool and wool-blends. Combined with the hoped-for pickup in the global economy and consumer confidence this would encourage improved ordering through the wool textile pipeline, providing a more sustainable base to support wool prices in 2004 -- particularly as wool supplies are forecast to remain low.
(Editor?s Note: The Woolmark Co. is the world?s leading wool organization.)