May 29, 2009
Australia's wool industry -- once courted by a range of buyers from Italy, South Korea, Taiwan and Germany -- has become almost entirely reliant on China, which has rapidly become the sector's biggest customer.
In March, 80 percent of Australia's wool exports were sent to China.
In the past seven years, China's annual take of Australian wool exports has risen dramatically from 39 percent to 68 percent. Australia's second-biggest customer, Italy, only buys 7 percent, down from 17 percent.
Germany and Taiwan, which together imported 10 percent of Australia's wool exports in 2001-2002, last year bought virtually no wool from Australia.
And although Australian wool still commands a healthy price, some industry players are starting to worry about Australia's dependence on continued demand from China, and a gnawing fear is emerging that Chinese buyers may use their dominant position to influence prices.
Chris Wilcox, executive director of the National Council of Wool Selling Brokers, says mills and traders in China compete fiercely on price.
"We have seen evidence of that in the past two to three months, with China buying a lot of our wool and yet prices at auction being bid up.
"However, my worry about such dominant position is the Australian wool industry's exposure to sovereign or countrywide risks. If China experiences a disruption (such as we saw with SARS in 2003) and its buying slows as a result, then our industry is exposed.
"Equally, of course, when China is able to keep buying because of its large domestic market while others are not, then it helps our industry. A two-edged sword if ever there was one."
"I think we have been extremely lucky that we have had the Chinese there who are able to process our wool," said Don Hamblin, the president of the peak grower body, WoolProducers. However, he adds, "We would obviously like to see other countries become bigger processors of wool, particularly India and the former centrally planned economies of Russia and Poland.
"We would like to see them become major processors of wool again to give some diversity in the market."
The Australian wool clip is the smallest it has been since 1925-1926.
The Australian Wool Production Forecasting Committee recently downgraded its forecast for 2008-2009 to 355 kilotons (kt.) -- 10.5-percent lower than last financial year, and it expects a further fall to 335 kt. next financial year.
Wilcox said the shrinking clip has wool businesses around the world "scrambling to try to secure volume, and looking at the way they manage their businesses."
"China is the one major export destination that we have seen an increase in volumes exported this season," Wilcox said.
But not only is China buying more wool, it is buying finer, higher-priced wool.
He said Chinese buyers are not only responding to the growing demand for fine wool used for trans-seasonal and high-end garments. They have also realized that while medium merino wools face stiff price competition from other fibers, notably cotton and synthetics, fine merino fibers have no real direct competitors.
Fine wool also commands a significant price premium over medium wool, and for years the Australian wool grower has been exhorted to "go finer."
And they have: in 1992-1993 at the end of the wool floor price scheme, fine wool comprised 8 percent of the clip. Today, it is 34 percent. Despite the falling clip volume, double the quantity of fine wool is produced today, compared with 1993.
Reprinted in part from The Australian