The economies impacting the Merino market

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Greasy wool prices continue to drift along, with the very fine merino categories an exception. Prices range from depressed (for crossbreds) to low (broader merinos) to quite high (very fine merinos). As a general comment, the greasy wool market is waiting (like most of the apparel fibre markets) for improved economic news from the major economies to stimulate a rising price cycle.

Western Europe is traditionally a bell-wether economy for greasy wool prices as they are cold, wealthy economies with a history of using wool apparel. While most of the early stage processing has moved to Asia (read China) in recent decades, the Europeans still import wool tops and yarn for processing as well as being a rich retail market. With this in mind, Figure 1 compares a survey of German manufacturing by the Ifo Institute (read here) with the average merino price in US cents per kg terms from 2004 to January.

There is a strong, positive correlation between the survey balance and the Merino price as the current weaker price is matched by a weak sentiment in German manufacturing. The Ifo Institute comments that the German economy is stuck in recession.

On the other side of the world, China has become the centre for wool processing and also a major consumer of wool at the retail level. As news in recent times has shown the Chinese economy has some real challenges in the form of a real estate crash, deteriorating demographics, and unemployment. Figure 2 shows the year-on-year change in the nominal GDP for China. This is truly a case of trying to reduce a massive complex economic system down to a single number, which is generally not a good idea. What Figure 2 does show is the marked step down in nominal growth in recent years, which matches the commentary coming out of China at present that things are tough. Demand for apparel at the retail level is not as strong as has been the case in recent decades.

So, at this stage, there is little good news coming out of Europe and China concerning economic growth. In the USA there has been some mention that credit growth may have bottomed and might be starting to turn up which would reflect a pickup in economic growth. This is a good reminder that economies wax and wane, with the good times never lasting indefinitely, but neither do the bad times.

What does it mean?

Wool prices tend to reflect the state of the major economies of the world as wool behaves more like an industrial commodity than an agricultural one, such as meat or wheat. Currently, two of the key wool markets (Europe and China) have very low economic growth so prices are relatively low. When these economies start to pick up wool prices will follow.

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Key Points

  • The German economy, the largest in Europe, is in recession which matches with low greasy wool prices.
  • In China there are plenty of economic challenges with nominal economic growth at low levels in comparison to recent decades.
  • There may be some green shoots in US credit growth but it is early days yet.

Click on figure to expand

Click on figure to expand

Data sources: Ifo Institute, AWEX, RBA, MacroBusiness, ICS, Mecardo

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