By Andrew Woods | Source: AWEX, PCI Wood Mackenzie, RBA
The various wool markets which make up our greasy wool market operate within a (much) larger group of apparel fibre markets. Wool prices need to be seen in context of the apparel fibre backdrop. This article takes a look at the current fibre price backdrop to the merino combing market.
A shorthand way of looking at the relative price levels of wool in relation to other fibres is to compare rolling percentile ranks of the different price series. Figure 1 shows rolling five year price ranks for the average merino micron price and cotton price series from the mid-1980s onwards, in US dollar terms. US dollar terms are used as we are interested in looking at the relative price ranks for each series as the supply chain will look at them.
The price rank runs from 1.0 which denotes the highest price level for the previous five years and 0 which denotes the lowest price level for the previous five years. A level of 0.5 flags a price level which has spent 50% of the previous five years at lower levels. The average merino micron price reached a rank of 85% in January, which means it has spent some 85% of the past five years at lower levels in US dollar terms. The cotton price rank has been rising since late 2015 (as has the wool price series), reaching a respectable 62% in January. Why respectable? Cotton still labours under high stock levels. The January price level is at the high end of the official ICAC price projection in 2017 which is US 75 cents for the Cotlook A Index plus or minus 8 cents.
If the cotton price remains around current levels then the rolling five year price rank will ease slightly. This means the wool price rank will be facing some downward pressure from the cotton section of the apparel fibre markets. The wool price series has risen to high levels before while the cotton rank was much lower, but on the two major occasions (the late 1980s and 2002-3) wool prices paid dearly in the following years.
Figure 2 repeats the analysis of Figure 1 with a polyester staple series substituted for cotton. It gives a similar picture to Figure 1 except the polyester staple price rank is much lower, around 27% in January. The gap between the wool and polyester staple price rank is quite wide. Forecasts for polyester staple prices are for prices to ease slightly in 2017, which translates into a slightly lower price rank. Low polyester staple prices really worry the cotton industry, where substitution seems to be more prevalent.
Wool can outperform the major apparel fibres strongly for only so long. Low supply will help support finer micron prices in the coming year while the broader merino categories will have increased supply working against them.
The average merino micron price in US dollar terms continues to outperform the major apparel fibres. However price forecasts for cotton and manmade fibres in 2017 point to their rolling five year ranks easing in 2017. It is easy enough to envisage finer micron merino prices continuing to outperform due to lower supply but broader merino categories will have increased supplies coming onto the market which will make continued outperformance difficult.
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