By Andrew Woods, ICS | Source: AWC, WI, AWEX, PCI Fibres, WTiN, RBA, ICS
The rise in the wool market since late March has been a strong one, with the 21 MPG rising from 1150 to 1320¢/kg clean. The market staged similar rallies in late 2012 and late 2013, rising by around 200¢ in both Australian and US dollar terms. This article looks at the apparel fibre background to the rally, including what this may tell us about what is happening and what is likely to happen down the track.
Figure 1 shows the rolling five-year price rank for the 21 MPG and cotton in US dollar terms. The average for May to date is used for the 21 MPG, while the cotton price for April is used for May. The graph shows that both price series have jumped, with the cotton price lifting off five-year lows (it is up some 10% since January).
The jump in cotton prices is likely to be limited (something like the analogy of a brick bouncing after being thrown from a height) as the cotton stock levels remain at record levels. For wool, prices in US dollar terms have fallen since early 2015. When it became clear that prices were turning, it seems that the traders sitting out of the market decided they should buy what was required. This resulted in a strong covering rally from a low price point.
But the question is – where to from here?
Figure 2 shows five-year price ranks (in US dollar terms) for a range of wool indicators and other apparel fibres. Cardings and crossbred (28 MPG) are booming along at five-year price ranks of 90% plus. After last week (the May sales to date), merino combing prices have lifted to respectable levels compared to other fibres. They are trading around their 30th price percentile. Next is cotton at 17%, with polyester, acrylic and cashmere all at low price percentiles.
In 2012 and 2013, the other apparel fibres were trading at five-year median price levels or better. This time around they are lagging well below wool price ranks. There is a good chance this will act as a drag on the market.
The other apparel fibres are signalling that the demand for combing merino wool is unlikely to be strong enough to pull prices higher or keep them at current levels. This, of course, assumes the fibres respond to similar demand signals (which is why they tend to have common price cycles).
The one possible flaw in this argument is that super strong carding prices continue to trade at high levels. In doing so, they put a base into the merino combing market (read What do the current high cardings prices tell us?). However, these categories can ease in price and still be expensive.
The rise in wool prices during the past couple of months has been most welcome, and looks to be similar to those rises seen in 2010 and 2013. However, the apparel fibre price backdrop to the wool market urges caution about where prices can go to from here (after a 200¢ rise) and how long they can sustain all of the rise. While cardings stay as strong as they are, there is little room for lower combing wool prices. However, price levels are never permanent (that’s why we have markets). In summary, the apparel fibre backdrop urges caution in our outlook for wool prices.
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