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Tuesday, September 08, 2015

Floating exchange rate lifts wool market by 20%

By Andrew Woods, ICS  |  Source: PCI Fibres, AWEX, RBA, ICS

Key points

  • While wool prices generally range from solid to excellent, depending on the category, only cardings and crossbred prices are performing well in US dollar terms.
  • Merino combing prices are trading close to five-year lows in US dollar terms, following the lead of most apparel fibres.
  • The lower Australian dollar of the past year has boosted local prices by around 20%, or 260 cents.

2015-09-08 Wool And FX FIG 1

2015-09-08 Wool And FX FIG 2

2015-09-08 Wool And FX FIG 3

Wool prices in Australia are having a great run (except for very fine merinos), seemingly shrugging off melt downs in equity markets and weak commodity markets. This scenario actually does apply to the cardings and crossbred markets, where fashion cycles continue to favour these categories. However, the real saviour for the merino combing categories is the floating exchange rate. What effect has the exchange rate had on the current market?

Figure 1 shows the Eastern Market Indicator (EMI) from 2010 onwards in both Australian and US dollar terms. The two series track each other closely through to 2013, at which point they start to go their separate ways. It was at this time that the Australian dollar started to fall from its high levels of the preceding years. By mid-2015, the two series had spread apart by 300¢/kg, with the US dollar price languishing near five-year lows (as it is for most apparel fibres).

To show what this means in terms of five-year percentile levels, figure 2 shows five-year ranks for a range of eastern indicators in both Australian dollar and US dollar terms. The high rank of the Australian dollar prices stand out, ranging from around 60% for 17 micron through to 100% for the 30 micron category. This means that the 17 MPG has traded at lower levels for 60% of the past five years awhile the 30 MPG has traded at lower levels for 100% (all) of the past five years.

Now look at the US dollar price ranks. The merino combing prices are nearly all in the bottom decile, while the crossbred and cardings categories are trading at high levels in US dollar terms as well. It is a case of chalk and cheese for the merino combing categories. What does the difference in price rank equate to in cents per kg? For the merino combing prices, it is around 20%, which means the currency is boosting local prices by around 260¢/kg.

What are the other apparel fibre prices telling us? Figure 3 shows the rolling five-year price rank for the 21 MPG and a polyester staple prices series (both in US dollar terms) for the past 30 years. In this simple comparison, about half of the price rank for the 21 MPG is explained by the polyester price rank. The current low rank for merino combing prices in US dollar terms is simply following the lead of the major apparel fibre prices.

What does this mean?

The wool industry tends to exhibit some bipolar tendencies, whooping with joy when prices are high and walking away when prices are low. Frankly, the industry would be far better off saving the emotion for more suitable outlets (such as families, politics or football) and focusing on building for tomorrow. Current prices are generally excellent (except for the very fine merinos), boosted by around 20% from the falling Australian dollar. The industry needs to understand that this is a windfall gain that should be used in preparing for the future, rather than being considered as a permanent price level. 

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