Low wool prices, along with dry seasonal conditions, lead to poor sentiment. Given the current low wool prices (and apparel fibre prices generally) the question is whether they will rebound, and if so, to what level?
Mecardo last looked at this subject in January 2023 (read
more here). For this article, the AWEX eastern 21 MPG is compared to a
weighted (by volume) average price for non-wool staple fibres (cotton, which is
the largest, acrylic, polyester and viscose). Prices are shown in US dollar
terms and have been adjusted for inflation (read
more here on US inflation). The data has been updated since then and the
correlation between supply and the price ratio of the 21 MPG to non-wool
apparel fibre price adjusted.
Figure 1 shows annual average prices for the 21 MPG and the
non-wool staple fibre (NWSF) series from 1992-93 through to the current season
to date. The two series follow a similar timing of rises and falls, albeit with
different magnitudes. The price series are adjusted for inflation. The current
deflated NWSF is at its lowest in three decades while the 21 MPG is not quite
at the low levels reached in the late 1990s. Basically, apparel fibre prices
(not only the various types of wool) are low.
Figure 2 compares the ratio of the 21 MPG to the NWSF (from
Figure 1) compared to the Australian auction sales volume of 20-22 micron wool
for the same period. Now, the volume data is incomplete. It should be for 20-22
micron merino wool from all the southern hemisphere producing regions (South
Africa, Australia – actually Western and eastern Australia, New Zealand and
South America) plus their stock levels at the time. For the sake of the article,
we assume the Australian volumes will reflect the change in the total volume of
merino wool from the southern hemisphere. The main message from Figure 2 is
that as the supply of 20-22 micron wool has fallen the ratio of the 21 MPG to
the NWSF has risen.
Figure 3 takes the data used in Figure 2 to compare directly
volume with the price ratio, and runs a trend line through this comparison. A
trend line is fitted to the comparison to establish where the fair value for
the 21 MPG given the supply of 20-22 micron wool and the level of non-wool
staple fibre (NWSF) prices is. For the current season, the estimate is US 1154
versus an actual average of US 854. This does not mean the price is going to
jump by US 300 cents in the next six months, but it does give a feel for the
potential upside in price when demand starts to recover.
Finally, in Figure 4 the actual annual average 21 MPG in US
dollar terms is compared to the modelled price (based on the trend line from
Figure 3). The 21 MPG can spend a number of years above the modelled price
(2016-2019) and a number of years below the model price (2022 to date) so it is
not useful as a measure of risk year on year. It is useful as a guide where
fair value is for the 21 MPG when looking forward 3-5 years, keeping in mind
the underlying NWSF also rises and falls. It is low currently so the risk when
looking forward 3-5 years is on the upside.
What does it mean?
The price for wool is driven by demand for apparel at the retail level, adjusted for stocks of wool and processed/semi-processed wool held along the supply chain. Demand is weak at present with non-wool staple fibre prices low and the ratio of the 21 MPG to these fibre prices low in turn. The upside potential is very good, requiring economic growth in the major economies to pick up thereby fuelling demand for apparel..
Key Points
- The 21 MPG looks to be well below fair value in relation to non-wool staple fibre (NWSF) prices currently.
- NWSF prices are also low at present, reflecting weak demand for apparel at the retail level.
- There looks to be plenty of upside for both the NWSF price and the ratio of the 21 MPG to the NWSF in the next few years..
Click on figure to expand
Click on figure to expand
Click on figure to expand
Click on figure to expand
Data sources: AWEX, RBA, US Federal Reserve, FibreYear, Emerging Textiles, ICS, Mecardo
