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Tuesday, December 02, 2014

What risk in the wool market?

By Andrew Woods  |  Source: AWEX, ICS

Key points

  • 19 micron prices are projected to have some modest upside in the next couple of months.
  • From early 2015 onwards, model projections point to lower prices, with wool prices dragged lower by low to easing polyester and cotton prices.
  • The projected scenario is very similar to that of a year ago.
  • Further weakening of the A$ would help to offset some of this apparel fibre price weakness.

In August, Mecardo looked at price risk in the 19 micron category and suggested that the prospects, on balance, were for prices to lift by 100 cents come early 2015. How did this projection fare in light of the market, and what is the risk model currently saying?

In mid-August, the risk model pointed to the 19 MPG lifting by around 100 cents in early 2015. We are still a month or so from early 2015, so there is time for the projection to be fulfilled but the apparel fibre price background to the wool market continues to deteriorate.

The August call on the market was a couple of weeks too soon, as prices eased in late August by 30 cents. However the 19 MPG is now 50-60 cents above mid-August price levels when the article was published.

The current projections for the 19 MPG are shown in figure 1. A range of projections are shown, with the middle projection (where the model indicates there is a 50% chance of being above or below this level) shown by the dark green line.

Projected prices are shown to increase modestly through to early 2015 and then start to fall away as 2015 progresses. This is very similar to the risk assessment for the 21 MPG made in November 2013 (when the 21 MPG was around 1250 cents and proceeded to fall to around 1100 cents by mid-2014) and the same fundamental reasons apply. Apparel fibre prices are weakening generally.

The model projections in figure 1 show only a small probability of prices substantially deviating from the central projection (both higher and lower). As price relativities between the different fibres stand at present, wool prices are fair value, which is the good news. The bad news is that apparel fibre prices are drifting lower, which will take the fair value price level lower with it. 

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What does this mean?

The model is pointing to limited rises in early 2015, with a general slide in wool prices from the autumn onwards. The basic reason for this projection is that apparel fibre prices are generally low and expected to remain weak, thereby dragging wool prices lower. Currently, the 19 micron category looks to be fair value in relation to prices for the main apparel fibres.

Mecardo information is provided to assist in your marketing decisions. It contains a range of data and views on the current market. It is not intended to constitute advice for a specific purpose. Before taking any action in relation to information contained within this report, you should seek advice from a qualified professional. The information is obtained from a variety of sources and neither Mecardo nor Ag Concepts Advisory will be held liable for any loss or damage whatsoever that may arise from the use of information or for any error or mis-statement contained in this report. 


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