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Wednesday, December 09, 2015

An update on the Carding - Combing basis

By Andrew Woods, ICS  |  Source: AWEX, ICS

Key points

  • The carding - combing basis is back to very low levels, flagging low downside risk for combing wool prices in the short term.
  • The MC is due to strengthen through to the March quarter before entering the downward section of its two-year price cycle.
  • Any short term widening of the carding - combing basis is going to have to come from an increase in the combing wool price.
  • The risk for combing wool prices looks to be on the upside, in the order of 50-150¢/kg.


2015-12-09 Carding Combing Basis FIG 1

2015-12-09 Carding Combing Basis FIG 2

In September, Mecardo concluded that the small carding – combing basis (ie, difference in price) indicated minimal downside risk for combing wool prices in the near future. Prices did ease by 50¢/kg clean in early October, before recovering by 100¢ and then maintaining that lift through to the current market. In this article, we update the carding - combing basis and add the Merino Carding cycle view (covered in October) to the outlook.

Figure 1 shows the Merino Carding (MC) indicator discount to the 21 MPG from 1998 onwards. The current basis is 205¢/kg clean, which is very low. The basis did reach 164¢ in October, so the basis could narrow further. However, history shows that the basis has a low probability of falling further, and tends to jump around when it is this low.

The article in September showed that, in recent years, the MC had been the main driver of change in the carding combing basis, which is a marked change from the previous 30 years. Figure 2 shows the MC (in Australian dollar terms) from 2004 onwards, along with the median two-year price cycle that the MC has exhibited during the past decade. The median cycle allows us to project ahead through to next spring.

There is always the risk that the market changes and does not follow past cyclical behaviour, so the projections are a best guess. If you look closely, figure 2 shows that the MC sometimes steadies rather than going through the downward part of the cycle.

The MC two-year cycle points to a strengthening MC through to early 2016 (March quarter), which is in line with its seasonal price pattern. The two-year price cycle than heads downwards, to the spring of 2016.

For the short term outlook, cardings seem likely to rise (matching the market feedback). This in turn means that the carding - combing basis can only widen if the combing price increases. Given the volatility of the combing - carding basis, it is very possible that the combing price may pick up by 50-150¢ in a rally sometime in the March quarter.

What does this mean?

A continued strong cardings market, with prospects for further strengthening into the first quarter of 2016, means there is little downside risk for combing wool prices. Given the propensity for the carding - combing basis to jump around when at low levels, there appears to be a good chance that combing prices will enjoy a rally in the order of 50-150 cents in early 2016.

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Northern MPG
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Mecardo information is provided to assist in your marketing decisions. It contains a range of data and views on the current market. It is not intended to constitute advice for a specific purpose. Before taking any action in relation to information contained within this report, you should seek advice from a qualified professional. The information is obtained from a variety of sources and neither Mecardo nor Ag Concepts Advisory will be held liable for any loss or damage whatsoever that may arise from the use of information or for any error or mis-statement contained in this report. 

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