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Thursday, May 14, 2015

Wool market has rallied – but where to from here?

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

Key points

  • The current price rise since late March is on par with strong price rises of late 2012 and late 2013.
  • The two previous price rises reached their maximum levels (in US dollar terms) in 2-3 months and then spent 3-4 months gently falling.
  • The view in Australian dollar terms is slightly different, with a falling exchange rate helping to support prices in the local currency after the previous rallies peaked.
  • Continued strong cardings prices indicate that the combing wool prices will hold onto most of their recent rises.

2015-05-14 Recent Wool Price Rally FIG 1

2015-05-14 Recent Wool Price Rally FIG 2

The rise in wool prices since late March has seen prices lift by 14% for the 21 MPG in Australian dollar terms, and by 19% in US dollar terms. The last time the market lifted by such proportions was in late 2012 and in late 2013. This article looks at these previous price rises as a possible guide to the pattern we can expect in coming months.

Figure 1 compares the price rises, for the 21 MPG in US dollar terms, of late 2012, late 2013 and this autumn using their respective starting points as the base set to zero. Both recent rises lifted by around 20%, as the current rally has. The previous rallies took around three months to complete their rises, before spending the following 3-4 months gently easing in price. Some five months after the start of these rallies, the market managed to retain 50% to 60% of the rise in price.

If the current market follows these past patterns then we should see the market reach the upper end of the rally in the coming month, followed by lower prices.

Discussing things in US dollar terms is all very well. However, what do the rallies look like in Australian dollar terms? Figure 2 shows the same analysis in A$ terms. The previous rallies both took longer to peak. They also took longer to fall. This was a result of the exchange rate falling away after the rally peaked in US dollar terms, which helped to hold up the value of the 21MPG in A$ terms.

In late 2013, the combing carding basis was at low levels (read our April article What can the high cardings price tell us?), and the rally in combing wool prices widened this basis. However, in 2015, the demand for carding wool has stayed strong. This is causing carding prices to keep pushing up underneath combing wool prices, narrowing the basis and limiting the downside risk in the latter. This rules out a big retracement in combing wool prices, and could be consistent with the combing wool prices holding most of their gains in the next 3-4 months.

What does this mean?

Looking forward in markets is always a fraught activity. However, we have a few indicators in the current market that help point to what is likely to occur. Continued strong cardings prices suggest that the combing market will hold most of their recent rises. The sobering apparel fibre backdrop to the market suggest we are not going to see a re-run of 2011. The rise of around 20% in 2012 and 2013 suggests that, after finding the peak of this rally, the market will spend 3-4 months gently easing into the spring.

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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