As wool is an industrial commodity, its general price level is very sensitive to the economic conditions of the major economies of the world. This article takes a look at this aspect of the wool market.
Mecardo last looked at the economic backdrop to the wool market in August (see article here), concluding that wool prices simply matched the weak economic growth of the major economies and opining that both booms and busts do not last forever.
The three major economic regions wool is concerned with are Europe, the USA and Asia (centred on China). Figure 1 looks at Europe through the German IFO Manufacturing Index (see more here), comparing it to the merino price (indicator fleece component of the clip) in US dollar terms. There has been no joy coming out of Europe during the past couple of years, as the Figure 1 shows. The German manufacturing index has continued to weaken. In recent months it has steadied, and hopefully this is a base.
Figure 2 compares the Chinese GDP (economic growth) and the change in the merino price (USD terms again), with guesstimates for the GDP growth rate in 2025. From around 2008-2009 through to COVID (2020) the Chinese economy was the major driver of wool prices, with strong correlations between Chinese economic data and changes in wool prices. Since COVID the correlations have weakened noticeably, with the importance of the Chinese economy as a driver of wool prices falling. However, weaker economic data from China is of no help to wool prices wanting an increase in demand in order to underpin a rising price cycle.
Finally, the USA is considered in Figure 3, which compares the year-on-year change in the US 5-year bond yield (inverted), advanced by 18 months, with the Merino price in US dollar terms. The advantage of this correlation is the 18-month lead time it gives as guidance to the likely trend in price change. If that sounds like a qualified comment on the correlation, it is, as one certainty in economic modelling is change in correlations. Contrary to the German and Chinese economic data, the US bond price points some pressure to push prices up between now and mid-2026.
What does it mean?
The best outcome for wool prices is when there is synchronised growth in all of the main economies. While it is not all bad news, at this stage only the US bond yields are supportive of higher wool prices. What we need is some better news from either Europe or China, preferably to underpin a strong rising price cycle.
Key Points
- German and Chinese economic data continue to underwhelm, thereby indicating minimal prospects of improved demand.
- US bond yields are the bright spot in the economic data, pointing to upward pressure on prices in the coming 12-18 months.
Click on figure to expand
Click on figure to expand
Click on figure to expand
Data sources: IFO Institute, AWEX, RBA, US Federal Reserve, World Bank, Nomura, ICS, Mecardo
