By Andrew Woods | Source: PCI Wood Mackenzie, Emerging Markets, Cotlook, AWEX, RBS, ICS
The strong merino market is even being quoted on some national news, which is a sign that prices are extreme and therefore of interest outside of the wool industry. Wool is a modest player in the world fibre industry, so it is instructive to look at the big apparel fibre to see what their prices are up to.
In early May, Mecardo looked at the price ratio of merino wool to cotton, showing the price ratio to be extremely high at present. Recent price movements in the wool market have only increased the price ratio. Another way to view fibre prices is to simply look at price charts (time series) of the different fibres, determining if there are cycle and trends operating (which is often the case) or some other story at play.
Figure 1, shows a price series for acrylic and polyester staple fibres in Asia for the past decade. Broader merino wool is often blended with acrylic and some polyester. Polyester is also the big gorilla of fibres, frightening even cotton. The price series are shown in US dollar terms, as this is how the supply chain will generally “see” the prices in terms of value. On a ten year lookback, the acrylic price is currently at its 81st percentile rank, which is a good rank. Polyester staple fibre has lifted in price since 2015, but is trading at a relatively modest rank of 41 percent.
Figure 2, shows the Cotlook A Index for the same period, in US cents per pound. 2011 stands out, this was when the cotton price went well above US200 cents per pound. Since 2011, the cotton industry has struggled under high stock levels, initially in China but now more outside China. Despite the handicap of high stocks to use, cotton prices have lifted since 2015 and are currently around the 77th percentile for the past decade. This is also an extraordinary performance.
Figure 3, shows the average merino micron price in US dollar terms for the past decade. The US price is a little more restrained than the Australian dollar price due to falling exchange rates since 2014. The average merino price has returned to its peak level of 2011 (keep in mind monthly average prices are used in this analysis which smooths out some of the short term volatility), when cotton was above 200 cents. The average merino price is therefore close to the top of its range of the past ten years.
What does this tell us? In terms of percentile ranks the merino price is performing better than the major fibres but acrylic and cotton have high percentile ranks as well. Apparel fibre prices have generally lifted from low levels in 2015, rising in varying strength up cycles. The performance of cotton is even more impressive than the merino price given its stock levels. Students of charting patterns will also note the current level of the merino price in US dollar terms looks suspiciously like a big double top (with similar peaks in 2011 and 2018).
While the merino wool price ratio to other fibres is extreme, the major fibres have been trending higher in US dollar terms since 2015. Cotton, despite a heavy handicap of high stock levels, is managing to trade at its 10 year 77th percentile level. In terms of percentile rank, acrylic (81st percentile for the past 10 years) and cotton are not too far behind merino wool prices. The case for wool exceptionalism is not as strong when other fibre prices are considered.
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