As wool prices work their way through the bottom of a price cycle it is worth remembering that wool is essentially a feedstock for an industrial process, with fashion tacked on the end of the supply chain. That is not how the marketers portray things however wool prices cycle trend along with industrial commodities, in particular other apparel fibres.
As an industrial commodity, the price of wool depends
greatly on the strength of demand which tends to be driven by economic growth
in the major economies. This is in contrast to agricultural commodities where
swings in supply tend to drive swings in price with wheat or sheep meats last
year being good examples.
Changes in supply impact wool prices in terms of price
relativities, be it price ratios to other fibres such as cotton or internal
price ratios such as premiums and discounts for micron or vegetable matter. The
only time that changes in supply drives wool price cycles is when major
stockpiles have been liquidated, in which case wool prices tend to rise by
100-150% in the following 18 months. The last example of this was in 2002 after
the RPS stockpile was finally liquidated in August 2001. The industry knew the
liquidation was coming, but the market reacted as usual.
As an example of how wool prices move in line with
industrial commodity prices Figure 1 compares rolling five-year percentiles for
the average merino micron price (merino) and copper. The schematic runs from
1984 to this month. Percentile ranks allow a direct comparison between prices
for two totally different commodities. It shows a high degree of similarity in
terms of cycles between copper and merino price ranks. They occasionally get
out of line such as in 2002 when wool prices went through their standard post
stockpile rising price cycle. The 2018 cycle was not as strong for copper as it
was for merino prices. While the post-COVID rebound was stronger for copper
than merino wool.
Figure 2 repeats the exercise, comparing merino and cotton
rolling five-year price ranks from 1984 onwards. The relationship is similar to
that of Figure 1 with the other major anomaly being in 1988 when cotton prices
weakened when wool was going through a very strong price cycle.
In Figure 3 merino and polyester staple fibre (PSF) rolling five-year
ranks are compared. In the current cycle, the PSF rank is holding at a higher
level than wool, but there have been several cycles where the ranks have varied
(2018, 1997 and 1988).
The key message is that wool does not exist in a vacuum.
When considering the state of the market, allied fibre prices and the economic
situation of key economies (which drive demand) need to be taken into account.
What does it mean?
Low merino prices are consistent with struggling performance of major economies, although not all merino prices are low. A common characteristic in markets is to extrapolate current price levels/conditions leading to overconfidence when prices are high and unnecessary gloom when prices are low. Industrial commodity prices have eased since 2022, to varying degrees, as economic growth slowed. At some stage, the economic cycle will turn for the better and wool prices will pick up as a consequence.
Key Points
- Wool acts like an industrial commodity rather than a simple agricultural commodity.
- As an example the Merino price percentile follows a similar pattern to that of copper, as does cotton.
- Economic cycles underpin fluctuations in demand for industrial commodities.
Click on figure to expand
Click on figure to expand
Click on figure to expand
Data sources: World Bank, RBA, PCI Wood MacKenzie, Emerging Markets, AWEX, ICS
