Growth, inflation and labour market all easing
Demand fundamentals limiting outlook for wool.
After an all-time high around two years ago, the wool price has faced a very tough run. The benchmark Eastern Market Indicator (EMI) has lost around 46% of its value (on a monthly average basis) since September 2018. While there was clearly a correction in the market last year, this year has brought further steep losses as the coronavirus pandemic evaporated industrial production and consumer demand.
Australia exports around 75-80% of its wool to China. Chinese buying activity –already falling before the virus hit –has been further dented by the pandemic. While Chinese industrial production has largely recovered, Chinese consumers remain cautious and forthcoming export demand is uncertain.
Clothing sales across a number of major economies crashed spectacularly in the first wave of the pandemic, but has recovered somewhat faster than many expected. Whether this continues remains to be seen, especially given the hit to incomes across many economies. This will limit the ability of consumers to make discretionary purchases. We must also consider the possibility of a structural move away from traditional wool-heavy office attire if working from home becomes entrenched.
The Australian dollar has recovered from its sharp falls at the beginning of the year and is now trading above 72 US cents. Our forecasts point to a weak USD seeing an AUD at 80 cents by mid-2022. We also expect the AUD appreciate against the Yuan, albeit more gradually.
Where does this leave wool prices? In our view it leaves limited upside this year. The return since the return from recess EMI has fallen to only a smidge above $10/kg, although last week saw stabilisation on a nearly 30% week on week drop in the wool offering. While a poor price will likely lead to domestic stockpiling, it is hard to see a pick-up in demand fundamentals and a higher AUD will be a drag. We see EMI around $10/kg this year and $12 next year.
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