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Tuesday, October 28, 2014

How is mid-break impacting wool price?

By Andrew Woods  |  Source: AWEX, ICS

Key points

  • The supply of wool with high mid-break levels has returned to the peak seasonal levels of a decade ago.
  • The level of mid-break in the clip usually peaks around the middle of the season (late or early in the calendar year).
  • Levels for October are similar to levels for September so we may be seeing the peak in supply now.
  • A falling supply of high mid-break would help allow the price effect to shrink back to the levels seen in the first half of 2014.

2014-10-27 Mid -break FIG 1

2014-10-27 Mid -break FIG 2

The effect on merino fleece prices of mid-break has continued to be substantial. This effect tends to increase as fibre diameter becomes finer but is also showing up for 20-22 micron fleece wool. This article looks at the current supply and price effect of mid-break.

Figure 1 shows the monthly proportion of additionally tested wool with a mid-break level above 75% since 2003, to last week. For September and October, some 18-19% of tested wool had mid-break levels above 75%. This is on par with the peak levels reached in 2004 to 2010, usually late in the calendar year. While the level of wool with high mid-breaks is not extreme by historical standards, it is certainly higher than in recent years.

Figure 2 shows the calculated price effect (discount) for 17 micron fleece with 90% mid-break compared to 17 micron fleece with 10% mid-break levels for the past year. This shows the discount was relatively stable until around June, after which it widened from 4-6% to around 10-12%.

The effect of mid-break is heavily influenced by fibre diameter, staple length and staple strength. For example, mid-break is effectively irrelevant for a lot that is 17 micron with a staple length of 115 mm and a staple strength of 20 N/ktx. The price has already been heavily discounted for length and strength so that mid-break does not really matter in this example.

The upshot is that working out the effect of mid-break requires firstly working out the lots mid-break will be considered as important to the final price, which is something of an involved task.

The increase in discount for high staple strength corresponds with the increase in the proportion of wool with high mid-break levels from July 2014 onwards. Demand also plays a role in the story of mid-break discounts, with Italian demand for better specified wools causing increased discounts for wools that fall outside of their specifications. At the same time, Chinese demand is reported to have become more specific in its requirements, leading to a greater focus on wool qualities such as mid-break levels. The combination of increased supply and greater focus on the buy side on mid-break has resulted in an amplified price effect.

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What does this mean?

A combination of increased supply and Chinese sensitivity to the coefficient of variation of hauteur in wool tops has led to an increased price effect for the level of mid-break in merino fleece prices since June. If the supply of mid-break is peaking now, as it appears to be, then lower mid-break levels from Christmas onwards will allow the premiums and discounts attributable to mid-break to return to the levels seen in the first half of 2014.

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