A premium Mecardo subscriber asked if we could look at the finer Merino micron categories with respect to the relationship between supply, price and gross sales value, following on from recent articles the latest of which looked at this for the 21 micron category.
The charts and analysis in this article follow the same format as the recent article on the 21 micron category, so we will dispense with again outlining the method used. Data for the 16 to 18 micron categories has been selected, effectively a 17 micron average which is on the finer side of the merino average fibre diameter of 19 micron (give or take half a micron) of the past decade. Below 16 micron volume falls away quickly and the market starts to break up with higher proportions of wool sold directly, so that by the sub-13 micron category nearly none of the current production is sold at auction.
The first point to note about the gross sale value (GSV) of 16-18 micron wool is the rising trend from the mid-1990s through around 2011, in line with the rising volume as shown in Figure 1. The correlation is high and positive between the two series, supporting the view that the market was building/being created as the supply increased. From 2011 onwards the GSV stabilised with a median level of US$590 million, with two exceptional years in 2017-18 and 2018-19 where the GSV was some 55% above its median level of the past decade.
Data for the current season runs to April, with a top up estimate made to complete the season. For 16 to 18 micron wool most of the action has taken place by the last quarter of the season so this estimate will be reasonably correct. It shows the GSV for this season to be slightly above the decade median and the GSV for last season to be only 7% below the decade median. That is a strong performance given the effect of the pandemic on many markets.
Figure 2 compares the GSV and average price (all lots/qualities in). Since 2011, price has had a higher correlation with the GSV than volume. From 2011 to 2015, price fell as volume rose but demand was weak with apparel fibre prices generally cycling downwards, so volume was not the only factor in pushing price lower. It is at this point that the complexities of the raw wool market intrude. In 2018-19 the supply of broad merino wool was plunging pushing prices for the broader merino categories to high levels, which helped support the finer merino prices despite their falling micron premiums at the time. This raises a question over how much of the high GSV seen in 2018-19 was due to demand and how much was due to upward pressure from the broader side of the merino market.
With volume appearing to have plateaued during the past seven years, the question now is whether the US$590 million (or thereabouts) GSV is the base expenditure level for the supply chain on 16 to 18 micron wool at auction in Australia? Time will tell.
What does it mean?
In the more immediate term the market has spent this season (and last despite the pandemic) close to its median level since 2010 on 16-18 micron wool. It seems unless the supply chain decides to have a re-run of 2017-18 (which seems unlikely at this stage as the other apparel fibres would be rising also) then any significant upside in price depends on a fall in supply, which is only happening to sub-17 micron wool at present.
Key Points
- Increasing supply from the mid-1990s to 2010 explains the increasing gross sales value.
- Since 2010 median gross sales value for 16-18 micron wool sold at auction in Australia has been US$590 million with two exceptional seasons where the expenditure was 55% higher.
- The question is now whether the US$590 million gross sales value is the norm about which supply chain expenditure varies.
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Data sources: AWEX, RBA, ICS
