The Merino Wool Market: What Has Gone Right and Can it Continue? Chris Wilcox Executive Director, NCWSBA and Chairman, Market Intelligence Committee of IWTO World Merino Conference Montevideo, Uruguay April 2018
The Merino Wool Market:
What Has Gone Right and Can it
Continue?
Chris Wilcox
Executive Director, NCWSBA
and
Chairman, Market Intelligence Committee of IWTO
World Merino Conference
Montevideo, Uruguay
April 2018
What Has Gone Right for
Merino Wool?
40
60
80
100
120
140
160
180
200
220
240
260
280
300Aus 16.5 micron
Aus 18 micron
Sth Af 21 micron
Aus 23 micron
Index
Jan 2010 =100 Local Currency
Merino Wool Prices on a High:Australia and South Africa
Source: AWEX, NZ Wool Services, Capewools, BWMB
Data to 29th March 2018
40
60
80
100
120
140
160
180
200
220
240Aus 16.5 micron
Aus 18 micron
Sth Af 21 micron
Aus 23 micron
Index
Jan 2010 =100 US$
Merino Wool Price Supercycles
DatePeak Price*
Price change - start
to peak*Weeks -
start to
peak
Comments
UScents Acents UScents Acents
February 1986
to May 19881203 1582
+743
(+162%)
+925
(+140%)111
Strong co-ordinated economic
growth, Soviet Union buying, China
begins, positive fashion styles
April 1993 to
March 1995707 949
+379
(+116%)
+496
(+107%)97
World economic recovery, post
Reserve Price Scheme collapse
“bounce”, China emerges
November 2001
to January 2003709 1211
+350
(+97%)
+501
(+71%)59
Last bale of the Australian wool
stockpile sold – kicks off price rise
May 2010 to
June 20111512 1434
+789
(+109%)
+564
(+65%)57
Global economic recovery after
GFC and cotton prices to 100+
year highs
April 2016 to
March 20181439 1830
+540
(+60%)
+586
(+48%)99+
Solid economic growth in US & EU,
general commodity price rise.
Constrained Merino wool
production.
* Based on the Australian Eastern Market Indicator, 2017/18 basis+ Peaked at 2nd March 2018
50
60
70
80
90
100
110
120
130
140
150
160
170
180
190
200
All Items Food
Metals Oil
Wool (Aus EMI)
Index: Jan 2016=100
General Price Rise for Commodities(US$ basis)
Source: The Economist metals and commodity prices US$ index; AWEX EMI in US$. Cotton Outlook for cotton and Mackenzie Wood PCI Fibres for polyester staple and acrylic
Data to 29th March 2018
50
60
70
80
90
100
110
120
130
140
150
160
170
180
190
200
Cotton
Polyester
Acrylic
NZ Broad wool
Aus 18 micron
Index: Jan 2016=100
Drivers of Demand for Merino Wool
• Economic conditions, consumer incomes and
consumer confidence
• Retail sales of clothing
• Consumer tastes and preferences– Business vs casual or a blend?
– Fast fashion
– Sustainability
– Luxury
• Prices for competing fibres
• Stocking and destocking of the wool textile pipeline
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Strong global
economy, USSR
buying, China
Wool Wars
1203
US cents/kg
Source: AWEX – 2017/18 basis
Data to 29th March 2018
World Economic Events and Merino Wool PricesAustralian Eastern Market Indicator
321 311
921
709
World economic
recovery, ‘dead-
cat’ bounce post-
RPS
706
World economic
recovery, cotton prices to
records, very strong A$
1508
trend
Asian Financial
Crisis
Global
Financial
Crisis
461
Stockpile
sold, supply
squeeze
1363
Euro debt
crisis
918
Double-faced
woollen
fabric mania
1074World
economic
growth
grows
solidly, low
Merino
supply
USSR implodes,
Tiananmen
Square. RPS
collapses
Broad-Based Economic Upturn in 2017 and 2018
-2%
0%
2%
4%
6%
8%
10%
12%
World China Euro-zone
USA Japan UnitedKingdom
Average 2000-2008
2016
2017e
2018f
2019f
% change yr-on-yr
Source: World Bank, Global Economic Prospects, January 2018
➢ Improved economic growth
forecasts in all key countries:― China, Germany, Japan,
France, Italy, US, UK and Korea
➢ Driven by higher investment,
trade, helpful economic and
financial policies and improved
confidence
➢ Consumer confidence at near 20
year highs in US and EU
➢ Clothing retail sales better in
most major wool consuming
countries
China Drives the Increased Demand for WoolCalendar Year
0 50 100 150 200 250 300 350 400 450
China
India
Italy
Germany
Czech Republic
Other Europe
Other
mkg greasy equiv.
2017 2016 2015
2014 2013
+2%
-5%
+5%
-5%
-3%
+3%
-0.4%
Note: From the five major exporting countries (Australia, New Zealand, Argentina,
Uruguay and South Africa
Source: Australian Bureau of Statistics, FLA, SUL, Capewools, Beef + Lamb NZ
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000 60,000
Apparel Wool Consumption Rises as Incomes Lift
Income (US$/head)
ItalyUK
Turkey
Japan
USA
Germany
S Korea
India China
Spain
Australia
Russia
France
Wo
ol co
nsu
mp
tio
n (
cle
an
kg
/pe
r h
ea
d)
Source: International Monetary Fund and Woolmark
Apparel wool consumption is apparel NDA at retail average 2015-2017 as estimated by Poimena
Analysis. Income is US$ GDP per head in 2017 on a purchasing power parity basis.
Trend Line
Knitwear35%
Men's suits11%
Men's overcoats6%
Men's jackets11%
Men's trousers10%
Women's overcoats15%
Other women's wear12%
World Trade in Wool Clothing in 2016(% share)
Source: Foreign Trade Statistics, International Trade Centre,
Poimena Analysis & Delta Consultants
Longer Term Outlook Positive
• Growing demand for fine Merino wool
• Long-term prospects for wool depend on
global economic conditions and income
growth, not relative production with other
fibres
• Demand for business-wear for men will
continue to be a mainstay for wool
• Knitwear a growth area, particularly with
increased demand for active leisurewear and
casual garments
• Coats the best performers in womenswear for
wool
• Trade in other women’s wool clothing
recovering a little
Product Segment Prospects:
Growth Opportunities For Merino Wool
Growth Mainstay Decline
Total and Merino Wool Production Stable At
Lows
0
100
200
300
400
500
600
700
800
mkg clean
Apparel wool
Interior textiles wool
Merino wool
Source: IWTO, Country statistics, Poimena Analysis
Updated March 2018
2016 total production
1,130.8 mkg clean
2017 total production
1,136.9 mkg clean
Near 70 year lows
2018 total production
1,145.7 mkg clean
Stocks:Use ratio
~8%
0%
1%
2%
3%
4%
5%
6%
7%
0
20
40
60
80
mkg clean % of Total Clip
mkg clean % of totalWORLD
But, Superfine Wool Production Remains High
0%
5%
10%
15%
20%
25%
30%
0
20
40
60
80
mkg clean % of Total Clip
% of totalAUSTRALIAmkg clean
Source: Poimena Analysis, AWTA, NZWTA, Cape Wools, FLA, Delta, American Sheep
Industries, China Wool Textile Association.
Updated March 2018
Australia Dominates Global Merino Wool Productionshare - 2017
Source: AWTA, AWEX, NZWTA, CapeWools, FLA, ASI, Delta Consultants,
estimates by Poimena Analysis
Australia
South Africa
Argentina
Uruguay
New Zealand
USA
China
Russia
Other CIS
Spain
France
Germany
Rest of world
Can It Continue for Merino
Wool – What Are The Risks?
Risks to Global Economic Growth
• Rising interest rates
• Global financial imbalances
• Credit risks in China
• Potential for a trade war – Trump Administration’s
unilateral action
Wool Garment Exports from China Falling Back(12 month moving aggregate)
Source: China Customs and China Wool Textile Association
Data to January 2018
30
40
50
60
70
80
90
100
110
dic-08 dic-09 dic-10 dic-11 dic-12 dic-13 dic-14 dic-15 dic-16 dic-17
mill. pieces
Sweaters Woven wear
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
jul-95 jul-97 jul-99 jul-01 jul-03 jul-05 jul-07 jul-09 jul-11 jul-13 jul-15 jul-17
Wool:cotton
Wool:synthetic fibres
Price Ratio
Source: AWEX, Cotton Outlook, PCI Fibres, CIRFS, Poimena Analysis
Compared with 21 micron wool. Data to March 2018
Merino Wool’s Price Ratios With Other Fibres
Rises to New Level
Shift to Crossbred Wool in Australia
Crossbred wool share of
total wool production has
increased
• 11% in 1991/92
• 12% in 2002/03
• 13.5% in 2008/09
• 17.2% in 2017/18
50%
60%
70%
80%
90%
100%
% breeding ewes Merino Ewes of Total
Has the Decline in Merino
Breeding Ewes in Australia
Come to an End?
Shift to Crossbred Wool in Australia
“Sooner or later coarse crossbred values will sink to a
low level…On the other hand, the world’s supply of
merino wool is decreasing steadily… Is it not time to
pause and consider well whether the outlook in regard
to wool production is sound? If we are to preserve our
wool supremacy in the future we must preserve our
merino flocks.”
The Sydney Mail, 24th July 1918
Constraints on Merino Wool Production
• Available land in a suitable climate
• Competing land uses– Cropping
– Forestry
– Dairy
– Beef
• Lamb and sheepmeat demand and prices
• Relative profitability
• Technology and productivity gains
Summary of Key Drivers
1. Higher economic growth leading to upturn in commodity prices (including
Merino wool)
2. High consumer confidence and higher clothing retail sales growth
3. Increased raw wool demand, notably from China
4. Increased use of Merino wool in active and leisurewear?
5. Low production of Merino wool
6. Virtually no stocks left
BUT
1. Risks to global economy
2. High price relativity for Merino wool against competing fibres
3. Lower trade in wool clothing, including men’s suits
4. Increased Merino wool production constrained
Merino Wool Price Supercycles – the Downside
Date
Price change –
peak to low*Low Price* Weeks
– peak
to low
Comments
UScents Acents UScents Acents
May 1988 to
March 1991
-666
(-55%)
-1045
(-66%)418 537 118
Collapse of the Reserve Price
Scheme, Soviet Union falls apart,
Tiananmen Square
March 1995 to
May 1996
-232
(-33%)
-343
(-36%)475 606 51
Market adjusts to massive
stockpile in Australia after ‘dead-
cat’ bounce post-collapse of
Reserve Price Scheme
January 2003 to
December 2005
-229
(-32%)
-562
(-46%)480 649 136
Economic slowdown, excess
stocks in wool textile industry,
SARS outbreak in China triggers
price fall
June 2011 to
September 2012
-549
(-36%)
-501
(-35%)963 933 57
Global cotton prices drop as China
builds up massive cotton stockpile,
causing drop in all fibre prices.
Excess stocks in wool textile
industry
* Based on the Australian Eastern Market Indicator, 2017/18 basis
Thank You!