Interviews
Wool becoming more competitive
24 Sep '08
6 min read
At this time last year there was generally less pessimism about the severity and duration of the US economic slowdown resulting from the sub-prime crisis. Demand for raw wool remained firm in the face of concerns about the falling supply of Australian wool, which led to a renewed upswing in raw wool prices.
However, the effects of the US economic slowdown and its follow-on effects are now well-known, affecting, among other things, consumer sentiment in OECD economies. Despite Australia's ongoing wool supply constraints, expectations of weak future demand for woollen products in the United States and European Union are forecast to lead to a softening of demand for raw wool in 2008-09. This will put downward pressure on wool prices, possibly mitigating any positive influence from a weaker Australian dollar.
China is, and will continue to be, the largest buyer of Australian wool, accounting for roughly two-thirds of Australian exports of wool (greasy equivalent). However, in 2008-09 supply constraints will lead to a smaller volume of raw wool shipments. The volume of total Australian wool exports (which includes greasy wool, semi-processed wool and skins expressed in greasy wool equivalents) is forecast to decline to 459 000 tonnes, a fall of 6.7 per cent from 2007-08. When combined with the anticipated fall in the wool price, export earnings are forecast to fall by 12.8 per cent to $2.4 billion.
Wool competes in a market where there are ready substitutes available to processors who are under intense pressure to keep costs down in order to remain competitive. The price competitiveness of wool is commonly gauged by its price relative to that of its principal substitutes, synthetics and cotton.
The ratio of the 21 micron wool price to the synthetic fibre price averaged 4:1 in 2007-08, a 14 per cent increase from the average of 3.5:1 in the first half of the 2000s. This occurred because the price of wool increased at a greater rate than the price of man-made fibres.
In 2008-09, a lower forecast wool price is expected to lead to a fall in the wool to synthetic fibre price ratio, with it returning to its longer-term average of 3.5:1. The decline in the 2008-09 price ratio reflects the increasing competitiveness of wool relative to synthetic fibre. This is a positive sign at a time when the current softening of global consumer demand is affecting all textile industries.
In the case of cotton, the ratio of the price of 21 micron wool to the Cotlook 'A' index has been declining since January 2008, from 5.9:1 in January to 5:1 in July. This declining price ratio reflects the downward trend in wool prices and the continuing upward trend in cotton prices. So far this season, the Cotlook 'A' index has averaged 16 per cent higher than the same period a year earlier. With cotton prices forecast to remain high in 2008-09, the competitiveness of wool relative to cotton should improve relative to 2007-08.
However, the effects of the US economic slowdown and its follow-on effects are now well-known, affecting, among other things, consumer sentiment in OECD economies. Despite Australia's ongoing wool supply constraints, expectations of weak future demand for woollen products in the United States and European Union are forecast to lead to a softening of demand for raw wool in 2008-09. This will put downward pressure on wool prices, possibly mitigating any positive influence from a weaker Australian dollar.
China is, and will continue to be, the largest buyer of Australian wool, accounting for roughly two-thirds of Australian exports of wool (greasy equivalent). However, in 2008-09 supply constraints will lead to a smaller volume of raw wool shipments. The volume of total Australian wool exports (which includes greasy wool, semi-processed wool and skins expressed in greasy wool equivalents) is forecast to decline to 459 000 tonnes, a fall of 6.7 per cent from 2007-08. When combined with the anticipated fall in the wool price, export earnings are forecast to fall by 12.8 per cent to $2.4 billion.
Wool competes in a market where there are ready substitutes available to processors who are under intense pressure to keep costs down in order to remain competitive. The price competitiveness of wool is commonly gauged by its price relative to that of its principal substitutes, synthetics and cotton.
The ratio of the 21 micron wool price to the synthetic fibre price averaged 4:1 in 2007-08, a 14 per cent increase from the average of 3.5:1 in the first half of the 2000s. This occurred because the price of wool increased at a greater rate than the price of man-made fibres.
In 2008-09, a lower forecast wool price is expected to lead to a fall in the wool to synthetic fibre price ratio, with it returning to its longer-term average of 3.5:1. The decline in the 2008-09 price ratio reflects the increasing competitiveness of wool relative to synthetic fibre. This is a positive sign at a time when the current softening of global consumer demand is affecting all textile industries.
In the case of cotton, the ratio of the price of 21 micron wool to the Cotlook 'A' index has been declining since January 2008, from 5.9:1 in January to 5:1 in July. This declining price ratio reflects the downward trend in wool prices and the continuing upward trend in cotton prices. So far this season, the Cotlook 'A' index has averaged 16 per cent higher than the same period a year earlier. With cotton prices forecast to remain high in 2008-09, the competitiveness of wool relative to cotton should improve relative to 2007-08.
Australian Bureau of Agricultural and Resource Economics
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