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Shift towards home working deals threat to wool prices

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The shift towards working from home - which has already caused ructions in the likes of coffee and cocoa markets as consumers switch buying habits – looks like affecting wool too.

 

If for sheep farmers themselves, the closure of offices caused by the coronavirus pandemic has made no difference to their day-to-day lives, for many of their customers it means a transformation of working habits – boding ill for demand.

 

As office workers ditch headquarters for home, so many are swapping suits for casual clothes based often on artificial fibres, or cotton – enhancing the threat to wool consumption from Covid-19.

 

“As people continue to work from home, and we consider the prospects of this trend continuing post-Covid-19, there is the possibility of a structural move away from wool-heavy office attire,” National Australia Bank said, countering ideas of a recovery in prices setting in.

 

‘Strong widespread competition’

After tumbling 11.3% in the first week of August – following a three-week recess –Australian wool values, as measured by the benchmark Eastern Market Indicator fell only a further 2 Australian dollar cents last week, to 1004 Australian dollar cents per kilogramme, albeit still representing the lowest price in some five years.

 

The slowdown in the rate of price decline reflected a cut in volumes offered for sale which, at 30,272 bales, fell by 12,492 bales week on week.

 

The proportion of wool unsold tumbled to 8.2%, from 30.1% the previous week.

 

“A better wool market greeted grower sellers… with a more appropriate volume of wool put up for sale relative to current demand,” said industry group Australian Wool Innovation.

 

“The smaller fleece offering attracted strong widespread competition, this stronger buyer sentiment helped to push prices higher,” said Australian Wool Network.

 

‘Rosier demand prospects’

And many commentators seen prices poised to stage some recovery, after near-halving in Australia market over the past two years.

 

Analysts polled by FocusEconomics sees prices averaging Aus$1,185 per kilogramme in the October-to-December quarter.

 

While wool values “are set to remain at low levels due to the global recession… higher production costs could lead to some increase”, the analysis group said.

 

Recovering fuel prices were, in particular, supporting wool production costs and thereby prices, FocusEconomics said, noting too “rosier demand prospects in China”.

 

‘Will likely remain under pressure’

However, National Australia Bank, besides noting the turn away from wool-based office clothing, took a more downbeat view of the potential for wool values to benefit from improved Chinese economic activity.

 

“While industrial production in China has largely recovered, Chinese consumers remain cautious and forthcoming export demand is uncertain,” NAB senior economist Phin Ziebell said.

 

Chinese wool imports plunged by 43% year on year in June, even faster than the 25% drop in buy-ins of cotton.

 

“And with alternative fibre prices subdued, wool will likely remain under pressure,” Mr Ziebell said, foreseeing “limited upside” for values this year.

 

“It is hard to see a pick-up in demand fundamentals, and a higher Australian dollar will be a drag” on exports.

 

Structural decline

The retreat in wool prices, exacerbated by the pandemic, follows a run-up in values to 2018 highs helped by a structural decline in wool output in Australia and many other major exporting countries, such as New Zealand.

 

Australian wool output has fallen by more than 60% over the past 30 years to reduce its share of world volumes from early-200s levels of 30% to less than 20% today – falling below Chinese production.

 

“There has also been a move away from mixed farming in the sheep-wheat belt towards cropping only enterprises, with fencing, sheds and management expertise gone,” NAB said.

 

“Many remaining sheep producers have transitioned to crossbreeds for fat lamb production.

 

“With lamb prices so strong, the incentive to focus on meat rather than wool is considerable.”

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