Tag: Analysis

The wool market is navigating a succession of head winds at the moment. Coronavirus (now named Covid-19) and increased tariffs by the US on Chinese garments are two major negatives that have emerged in the past 6 months.

The explanation for the underpinning of the wool market at these levels is the supply situation; anything like the supply volume of past years and the market would have well and truly buckled under these pressures.

A reduced flock, growers willing to withhold or pass-in wool at auction and the reported low stock position at mills is the counter-weight keeping the market levels in relative equilibrium during these uncertain times.

The Eastern Market Indicator (EMI) eased slightly this week, giving up 9 cents closing at 1,568 cents. The AU$ was also slightly lower to close at .672 cents. In US terms, the EMI fell 11 cents to 1,054 cents.

The Melbourne market offered a designated Tasmanian sale, with the trade keenly bidding on the selection of very good style lots. Also of note in Melbourne & Sydney was the Crossbred section that improved 15 to 56 cents. The Fremantle catalogue being without these positives lost ground, the Western Market Indicator (WMI) dropping 42 cents to close at 1,667 cents.

Supply should remain tight into the rest of 2020. Wool producers are relatively “cashed-up” after 2 to 3 years of strong prices, and coupled with record lamb and mutton markets are emboldened to take a bullish approach to selling;  any perceived weakness is met with reduced clearance to processors. Producers are happy to ride the market and bet on a reduced future supply supporting prices in the future.

An increased national offering of 40,176 bales came forward, however, growers were reluctant sellers causing a pass-in rate of 22.0% nationally for the week. This resulted in 31,326 bales clearing to the trade. To date this season we have sold 138,724 fewer bales than last season (5,100 per sale).

The dollar value for the week was $53.39 million, for a combined value so far this season of $1.348 billion.

Crossbred types bucked the general market trend to post good gains, however, cardings were cheaper in all centres. Again poorly prepared Crossbred lots at times found little support.

This week the wool market operated under the shadow of the Novel Coronavirus, causing widely differing predictions as to the likely impact this would have on the market. With China the dominant force in the wool market by a long way, concerns were high as to the likely effect.

The reality was that the wool market improved in a week of global uncertainty, confounding many observers.

The Eastern Market Indicator (EMI) rose both selling days this week, to scrape back some of its recent losses, closing at 1,577 cents. The AU$ improved marginally to close at .675 cents. In US terms, the EMI rallied 22 cents to 1,065 cents.

The Western Market Indicator (WMI) also improved by 26 cents to close at 1,709 cents.

The wool market at this time is remarkably well balanced. In January the low stock holdings by processors became a concern, and buyers bid the market up with growers responding and selling 90,000 bales in the first two weeks of 2020.

With all the concerns of the global trade situation in recent times, demand has contracted and the effect has been that growers only cleared to the trade 50,000 bales in the past two weeks. The balance between supply & demand is currently being managed well with these supply adjustments assisting prices to remain solid in volatile times, unlike previous negative global trade events.

The national offering of 30,562 bales came forward, with a better market encouraging a reduced pass-in rate, settling at 14.8% nationally for the week. Just 26,027 bales were cleared to the trade.

The dollar value for the week was $43.35 million, for a combined value so far this season of $1.294 billion.

The crossbred types continued the trend of late last week to also lift, the only exception was the 26 MPG in Melbourne. It was noted that poorly prepared Crossbred lots made up most of the passed in lots in this section. Cardings indicators in all centres posted gains reflecting the generally stronger overall market.

The week ahead

The market demonstrated remarkable resilience this week, and with reports of low stocks held by processors any return to normality in China could well see demand and prices lift. The Chinese New Year usually causes a slow-down in business activity, and coupled with Coronavirus concerns factory activity has been almost at a standstill. This will have continued the decline in stocks on hand at the processor end.

The offering posted for next week is 42,900 bales and is a designated Tasmanian sale. The following weeks are posted at 36,381 and 37,485 bales.

The last fortnight in January saw both yarding and slaughter levels post a significant retracement for lamb and sheep markets across the east coast with the tight supply keeping prices well supported.

From its mid-January peak combined weekly lamb and sheep yarding levels along the east coast has shed 37% to test toward 210,000 head. Despite the sizeable drop in sale yard volumes the magnitude of the fall is in line with what would be expected by the five-year trend pattern – Figure 1.

A similar picture emerges for the combined weekly lamb and sheep slaughter numbers, posting a 24% drop from the January peak to finish just below 400,000 at the end of the month. Although the percentage magnitude of the fall in slaughter is smaller than that for yardings, the decline in slaughter sees it testing the lower boundary of the range that would be considered normal for this time in the season – Figure 2.

As the yarding and slaughter data has a week lag there is a chance that supply has remained low as we have headed into February with producers blessed with rainfall given some confidence to hold onto stock. Certainly, the lamb and sheep price movements this week suggest that sales remain tight, but we will have to wait for confirmation when the yarding data is released into next week.

The Eastern States Trade Lamb Indicator (ESTLI) responded kindly to the tight environment this week posting a 2.5% lift to close at 829¢/kg cwt. However, the National Mutton Indicator (NMI) managed a more robust performance, jumping 5.0% to finish a cent shy of 600¢/kg cwt – Figure 3.

The strong opening in mutton markets for 2020 really stands out when comparing back to 2019 levels for this time in the season. The NMI is a comfortable 61% higher than this week last season and the ESTLI isn’t looking too shabby either, with a 31% premium on it’s 2019 level. Remarkably, the NMI is just 34¢ below where the ESTLI was at this time last year.

Next week

All of the eastern seaboards are expected to get a bit of a drenching in the coming week. While much of the heavier falls are limited to the coastal zones there is still up to 50mm forecast to reach into central NSW and Victoria. An increase to sheep and lamb supply seems unlikely given the prognosis for rain in the short term so prices should continue to be supported into next week.

Confidence in the wool market took another hit this week as the flow on effect of the Novel Coronavirus has been rearing its head. Local exporters took their cues from foreign importers who are uncertain due to disruptions in mills and trade flows. The opening drop in the market saw sellers withdraw their wool, prompting a nervous recovery due to the extra pressure on the lots remaining.

The Eastern Market Indicator (EMI) fell some 56 cents at market open, the largest daily fall since August last year, but regained around half that ground to close at 1,548 cents at weeks’ end. The AU$ demonstrated a similar downward trend, stabilizing mid-week before dropping again to close at .67 cents. In US terms, the EMI fell 38 cents to 1,043 cents.

The Western Market Indicator (WMI) had a somewhat gentler descent to close at 1,683 cents. Earlier in the week, Mecardo released an article about the historical impacts of pandemics such as the Novel Coronavirus of recent days. Response measures employed by affected nations are proving disruptive to economies and trade flows. For wool, workforces in overseas mills are being impacted, creating uncertainty for importers of Australian wool, which has a flow on effect to the buying confidence of local exporters.

The national offering of 33,700 bales came forward, but the sharp drop in prices collided with firm seller resistance at weeks start, to see the pass in rate climb to 48.8% before settling at 28.8% nationally at market close. Only 24,002 bales were cleared to the trade, the smallest clearance since September last year. The reduction in quantity put extra pressure on the lots remaining, which sparked the recovery demonstrated on the second selling day.

The dollar value for the week was just $36.63 million, seeing a small adjustment to the combined value so far this season, which is now just over $1.251 billion.

The crossbred types saw the same fate as the other MPGs, with prices first dropping before a recovery at the end of the week. Cardings indicators weathered the storm better, still feeling the blow in the north, but scraping to a small rise in the South and West.

The week ahead

The black swan event of the Novel Coronavirus is something no one wants to see and our thoughts go to families of those directly affected. The market effect of the event coming out of the blue has caused more uncertainty in what looked like a stabilizing market.

The offering posted for next week is lower at 35,849 bales and is a designated superfine sale. The following weeks are posted at 43,570 and 37,726 bales.

The 2019 Novel Coronavirus (2019-nCoV) is causing ructions in various markets as the Chinese and associated economies are disrupted by the efforts to limit the spread of this new virus. This article takes a look at recent pandemics and their effect on wool prices.

2019-nCoV (2019 Novel Coronavirus) is the third coronavirus of the past two decades. It was preceded by SARS in 2002-2003 and MERS in 2014. In between, there was the H1N1 flu pandemic of 2009-2010.

Figure 1 shows the 19.5 MPG from 1999 to last week with the periods when pandemics were present. On the surface, the price reaction to SARS looks ominous with price falling by 28% in early 2003 (in US dollar terms the fall was 20%). The next two pandemics (H1N1 and MERS) happened when prices were near cyclical lows and did not seem to have any great effect.

SARS (https://www.cdc.gov/sars/ ) was first reported in China in early 2003. It ran to mid-2003 with a mortality of 774 people. It would be fair to say that the current outbreak of 2019-nCoV (also starting in China) is being treated with a far more robust response by the Chinese government. This response, which includes cancelling Lunar New Year festivities, extending the Lunar New Year holiday, locking down large areas and restricting travel, will disrupt the Chinese economy and other economic areas associated with China such as Australian universities which have a high proportion of students from China.

In 2014 MERS (a coronavirus) appeared in the Arabian peninsula, with an ultimate mortality level of 858 people.

In 2009 the H1N1 virus (https://www.cdc.gov/flu/pandemic-resources/2009-h1n1-pandemic.html  ) began in Mexico. In Figure 1 it is associated with a small rise in the 19.5 MPG. The H1N1 virus killed 20 times as many people (verified) as SARS, with estimates of worldwide deaths ranging between 150,000 and 575,000.  H1N1 dwarfed SARS in terms of mortality, but hardly registered in terms of wool price. This seems to confirm the view that it is the response measures (such as is going on in China presently), which impact on wool demand rather than the actual mortality levels.

The exception to the above view is if 2019-nCoV turned out to be another Spanish Flu (1918-1920) https://www.cdc.gov/flu/pandemic-resources/1918-pandemic-h1n1.html where one-third of the world’s population was assessed as being infected with 10% of these people dying. This was the worst pandemic of the 20^th century. That is what drives the various health authorities around the world to contain 2019-nCoV as much as possible.

What does this mean?

In cold-blooded terms the economic effect of recent pandemics has not been related to the mortality levels, but rather to the disruption caused by measures designed to limit the spread of the pandemics. The current coronavirus is centred in China which is a critical manufacturing centre for the world economy. Strenuous efforts by China to limit the spread of 2019-nCoV (much more so than for SARS) seem likely to cause some short term disruption to demand for imports such as greasy wool hence reducing demand and price.

Welcome rain across the eastern seaboard this week provided a jolt to lamb prices with most NLRS reported categories posting solid gains of between 20-60¢/kg on a cwt basis. The expected lower supply of lamb for the 2020 season already making a presence in lower weekly slaughter volumes and adding further support to lamb prices.

Figure 1 highlights the rainfall pattern for the last week and shows some good falls recorded across eastern NSW and Victoria. Western NSW and SA could have done with some more, but at least the Bureau of Meteorology’s three-month rainfall outlook is looking more promising for a decent autumn break for producers in these regions.

East coast weekly lamb slaughter volumes have opened the season below the five-year trend and is running at levels under the 2019 trend for early January – Figure 2. Over the first fortnight of 2020 lamb slaughter volumes are averaging 5% weaker than the five-year pattern with just over 360,000 head processed on average per week.

The lower lamb supply is also showing up in the east coast lamb yarding numbers with last week’s figures coming in 12% below the five-year pattern. Given the level of reduction in breeding ewes last season and the dip in the sheep flock to lows unseen in a century it is unsurprising that we are witnessing a dearth of lambs early in 2020.

The Eastern States Trade Lamb Indicator (ESTLI) responding well to the rain and shortage in supply to see a 5.5% lift on the week to close at 779¢/kg cwt. The National Mutton Indicator (NMI) posting a more modest 2.7% gain to 576¢/kg cwt – Figure 3.

Next week:

More rain is expected for the northeast corner of NSW in the coming week, but little else for the bulk of the remaining sheep rearing regions across the country. Some huge falls are anticipated for northern Queensland and could signal the beginnings of the summer monsoon pattern. With some luck, some of this moisture will carry south into areas of SA and western NSW that are still in need.

In the interim, there has probably been enough rain in the last few weeks to see lamb and sheep prices remain supported over the short term.

The impressive opening to the 2020 selling season, pronounced by three successive weeks of rises, has hit a roadhump as the Australian wool market has recorded overall losses this week. The fragility of the market was clearly evident as prices changed day to day, sometimes up and other times down. A softer tone was evident as soon as selling began, with the market settling on the final selling day as buyers found a price basis they were comfortable with.

The Eastern Market Indicator (EMI) fell every day except Thursday and closed down 33 cents at 1,576 cents, a massive differential to this week last year when it reached 1,927 cents. The AU$ saw some very minor corrections over the week and now sits around the middle of US $.68 and $.69 cents. In US terms, this moved the EMI down 29 cents to 1,082 cents.

The Western Market Indicator (WMI) also eased slightly to finish the week 1,685 cents. As evident in Sydney & Melbourne, WA prices were up and down over the course of the week, with an overall downward trend as buyers wrestled to find a price they could stomach.

The national offering was very similar to last week, a total of 52,666 bales came forward, elevated as expected for January. The pass in rate increased to the mid-teens of 15.9% nationally. This meant that 44,273 bales were cleared to the trade, a top 3 performance since January 2019.

The dollar value for the week was $75.15 million, while the combined value so far this season is just under $1.215 billion.

The crossbred types saw the same fate as the other MPGs, with prices yo-yoing across the week. Oddments defied the general trend, however, propelled by a demand in locks, pushing Cardings indicators up by an average of 30 cents.

The week ahead

With the stabilization of the market on Thursday and a lower offering pegged for next week, it is possible the market has found a short-term base. How much prices fluctuate will depend somewhat on buyer confidence, so it will be important to watch for portents and omens in the Lunar New Year.

The offering posted for next week is significantly lower at 40,680 bales and the following week is a designated superfine sale.