By Andrew Woods, ICS | Source: AWTA, AWEX, WTiN
Seasonal conditions (for the past year) continue drag along at generally drier levels than the previous 12 month period to July 2014. This means the supply of fine wool is being maintained. This article takes a quick look at 16 micron volumes, premiums and relationship to cashmere prices.
Mecardo last looked at 16 micron supply and price premiums in October 2014. The year-on-year change in supply accounts for about two thirds of the year-on-year change in price premium (in this sense, we are discussing premiums for the 16 micron category as a whole rather than for spinners’ style wool), so change in supply is the key factor to monitor.
Figure 1 shows the year-on-year change in supply and price premium for 16 micron wool from the mid-1990s onwards. In the late 1990s the supply of 16 micron wool was relatively small, with volumes volatile as a consequence.
During the past 10-15 years, 16 micron volumes have increased and the volatility of supply has decreased. Premiums have decreased and their volatility has also decreased. However, the relationship between changing supply and premiums has strengthened. Apart from increased supply, fine wool premiums are also suffering because the strength of wool prices increases as the fibre diameter increases, with crossbred prices having a fantastic run.
The other basis (price difference) we are interested in for 16 micron wool is the basis to cashmere prices. There is a view that European processors switched their focus to cashmere in the 1990s following the disaster caused by of the collapse of the Reserve Price Scheme, despite wool being described as having better processing qualities.
Whatever the reason, cashmere trades at five to ten times the price of 16 micron wool. Figure 2 shows the 16 micron basis to cashmere (the 16 micron price expressed as a percentage of the cashmere price) from the mid-1990s onwards along with the annual supply of 16 micron wool (in farm bales).
During the late 1990s, the 16 micron price traded at 15% to 20% of the cashmere price. As the volume of 16 micron supply began to rise from around 2000 onwards the basis fell to around 12%. You can see the basis picking up or falling as supply does the opposite.
In 2013, the supply of fine wool, which had been trending lower since 2006-7, started to rise sharply. The basis to cashmere reacted equally sharply by falling to below 10% and staying there. From this view, there is plenty of upside for the 16 micron price (keep in mind cashmere goes into knitwear) when supply steadies and (hopefully) eases slightly as a result of a couple of good seasons back to back.
Supply or, more specifically, ample supply, remains an issue for fine wool premiums. Year to year changes in supply explain around two thirds of the variation we see in fine wool premiums. Supply has been slow to ease after the rise in 2013 and 2014, with dry seasonal conditions helping to maintain supply. The low basis to cashmere shows that there is plenty of scope for fine wool prices and premiums to pick up. However, this will require supply to ease and some favourable fashion cycles.
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