Insights June 2020
Insights June 2020
- Australian wool prices are expected to remain under pressure, with low global demand the key driver of this expected trend.
- Favourable seasonal conditions and growing producer stocks is likely to see an ample supply in the Australian market over the next 6 months.
The Australian wool market continued to feel downwards price pressure as a result of COVID-19 during May, with a strengthening Australian dollar also softening prices. There have been weeks where the AWEX EMI saw gains, however, this was most likely patches of high demand in which last minute orders needed to be filled and not necessarily an indicator of the market beginning to recover.
New South Wales and Victoria in particular, have had a good start to the year and more rainfall forecast for this winter is expected to result in a larger amount of higher yielding wool enter the market next season. Following drought on the east coast that still has not broken in some areas, low yielding wool clips have flooded the market this season and large premiums have been seen for certain micron wool clips of high quality.
In the current low demand environment, wool supply has been held back from the market and season to date offering is 11.3 per cent behind down year-on-year. Whilst 2019/20 wool production is expected to be 6.3 per cent below the 2018/19 season, there is still a significant amount of wool in grower hands that will pressure values in the future. While high mutton prices incentivise more producers to send a greater proportion of their herd to slaughter, this is likely to be offset by more favourable seasonal conditions leading into next season.
Demand for Australian wool remains at the mercy of a recovery in the global economy from the impacts of COVID-19, with buyers only purchasing on a hand-to-mouth basis. Chinese manufacturing continues to recover, however, there remains little demand for the end product of their mills and processors. Additionally, the Northern Hemisphere is approaching summer, which will further work against an uptick in wool demand.
Given trade uncertainty building around China following export bans of some meat processors and tariffs on Australian barley, there have been calls to diversify our export customers. Markets such as the US and areas of Europe that have been absent from the Australian market due to high prices driven by Chinese demand, have begun to enquire about purchasing Australian wool. While reduced demand from China and declining prices are negative for the market, the beginning of some diversification of export destinations away from one key market could be seen as a silver lining of the COVID-19 outbreak.
Low global demand for wool, coupled with high supply being held in grower hands and favourable seasonal conditions for next season, will continue to place downwards pressure on the Australian market in coming months. High quality, fine micron wool remains in demand, although the low market sentiment will continue to weigh on these values.
Sources: Australian Wool Exchange, Australian Wool Testing Authority