China to blame for wool's slide

Last week the Australian Wool Exchange (AWEX) Eastern Market Indicator dropped below 1000 cents a kilogram at 993c/kg, the first time in almost a year.

But since the announcement of a Chinese government-led stimulus package on Wednesday last week, there had already been a slight price rise in wooltops and yarn in China.

Adelaide-based Mr Dennis, who recently led a 13-day Elders China Wool Tour, said the past eight weeks had been lacklustre for Australian wool.

"Almost 100 per cent of that cause was China," he said.

"Their last gross domestic product growth figures indicate 7pc, where their aim is for 7.5pc," he said.

"The government is trying to shift the economy from a government stimulus-led economy to a more consumption based economy.

"This is happening but there is a bit of angst among the Chinese consumers as to what this means for them, so they're being hesitant about spending - therefore wool consumption is certainly down in domestic China."

Chinese companies operating in the "export space" were okay, but companies solely relying on the domestic market were finding it tough.

"The Chinese government is very aware of the economy slowing and they don't want growth to slow below 7.5pc because it's such a big economy it takes a long time for these cyclical adjustments to take place," he said.

"As far as wool is concerned, once the Chinese consumers get some confidence back they will start buying."

Other countries remained reasonably active in buying Australian wool.

"We're in April now so wool supply in Australia is dwindling," he said. "Grower stocks have probably built up over the past two months, but seasonally our wool supply starts to dwindle late autumn to winter, so if we do get a burst through to winter, more confidence from the Chinese and more orders, we could see a spike in the market price."

At the moment 21-micron wool was 1070c/kg clean weight - and ideally would get back to 1200c/kgcw this year.

"Last year we got down to 1050c/kgcw then we got back up to 1200c/kgcw, so depending on which chart you look at, wool is on a slow up-trend, which it has to be because farmer's costs are also on an up-trend," he said.

"There's no point in selling wool cheaply because that's not going to help growers' returns - we need to be charging more every year for wool as growers costs are going up every year."

The long-term outlook for wool was "fantastic".

"We saw from AWI the type of work they are doing in China to get more wool into casual wear, which is obviously a growing market," he said.

"Factories who are operating in that space at the moment are doing very well.

"So I think there's going to be a huge potential for growth here as a consumer market in that more casual aspect of fashion, because of the number of people who are middle class or above.

"There's going to be some ups and downs as we go through the Australian winter season because that period is when there is not usually much processing demand.

"We might see the odd surge in demand if the Chinese economy starts moving quickly and we have low supply, but then we run into that end-of-year processing season of July-August when the trade doesn't need to buy wool, but then we'll get into the next season from September onwards and despite the lacklustre demand in the past couple of months there's not a real buildup of stock.

"So we're pretty well positioned for that increase in demand to come and therefore prices to rise."

Other factors that would push prices up included an improving United States economy, improving European economy and dry conditions in Queensland and NSW meaning there were lower quantities of wool available.

"I think what a lot of growers on the Elders China Wool Tour have been able to see the infrastructure, the investment and the commitment of the Chinese wool processing industry and also their passion for wool among people in the industry up here," he said.

"And I think they now have an understanding that the processing trade up here is not trying to screw the price down. They are just as much at the mercy of the market as the woolgrower is, and at this price level they are certainly not adverse to seeing the price go up, because they know it's starting to get tough for growers to maintain the business case for sheep.

"Having said that, what growers have heard about the meat industry here is certainly an added bonus for the sheep industry in Australia because meat is set to boom, and Australian meat is very well positioned because of its clean and green credentials."

Miranda Kenny travelled to China courtesy of Elders as part of the 2014 Elders China Wool Tour. See next week's Stock Journal or visit stockjournal.com.au for more stories from the trip.