Wool may see 'voracious' rally - unlike cotton

Are markets about to indulge in a trend of splitting hairs? (Or splitting fibres, at least.)

Prospects for cotton prices have taken a dive with improving ideas for this year's crop in the US thanks to rains which have relieved drought in Texas, the country's top producing state.

Concerns over US export prospects too have also hit prices, after a series of disappointing data on weekly sales to importers, culminating in the figure of less than 28,000 running bales for last week, the weakest in two years, which sent December cotton futures also to a two-year low.

Purchases for 2014-15, which starts in August, by top-importer China from the US, the biggest exporter, are down 26% on forward orders a year ago.

'Lacks a stock overhang'

However, for wool, for which the 2014-15 marketing year starts next week and in which output in Australia, the top exporter, is at a record low - price prospects are not nearly so bad, according to Australia& New Zealand Bank.

Both fibres are sharing the problem of weaker Chinese import demand, with the country's orders of wool from Australia, the top exporter, hitting a five-year low in the January-to-May period.

However, while China's soft cotton imports are a reflection of huge inventories - the result of a, now reformed, policy of guaranteed prices for farmers which prompted huge sales to the state "the wool market lacks this stock overhang", ANZ analyst Paul Deane said.

This means that wool prices "could be supported in the second half of the year as mills restock".

The level of about $9.50 a kilogramme at which Australian wool values have consolidated "sets a floor in wool prices for the rest of 2014, with the potential for prices to rally in the second half as Chinese mills return to the market".

'Slight rise in confidence'

In fact, wool prices in the latest week, to Friday, showed some upward movement, adding 0.2% to $9.61 a kilogramme, clean, equivalent to Aus$10.22 a kilogramme, according to Australian Wool Innovation, which promotes Australia's wool.

"Exporters spoke warily throughout the latter part of this week of a slight rise in confidence from clients in mainly China and India," AWI said, flagging also that, "unusually for this time of year, European interests were also showing some signs of activity for the better wools".

At National Australia Bank Vyanne Lai, agribusiness economist, said that "unusually high prices" of South African supplies were behind the "improving" demand signs, prompting "some level of switching to Australian wool".

Ms Lai attributed the weak exports to China so far in 2014 largely to a financial factor, in a squeeze on credit for the country's manufacturers.

"Chinese authorities clamped down on lending and raised required capital-to-loan ratios for a number of banks," she said.

'Very low stock levels'

Prices of wool are also being supported by a 5.8% fall in Australian production to a record low of 340,000 tonnes in 2013-14, with a further drop, of 3% to 330,000 tonnes, expected next season.

The drop reflects dryness in eastern Australia which has raised sheep slaughter rates, prompting a 6.0% drop to 77.0m head in the number of sheep shorn in the season ending on Monday, and with a further 3.5% drop to 74.3m head expected in 2014-15.

"One factor that all traders agree upon is that greasy wool stocks in front of machines at all manufacturing countries is at very low levels, and just a slight increase in demand can potentially send the market upwards with voracity," AWI said.

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