Special Report

For the latest edition, please Refresh frequently visited pages.

With Adrian Field, Melbourne
Trading Manager

June, 2004

A look back – for a better future

THE wool industry is now experiencing one of the longest periods of price consistency since the scrapping of the reserve price scheme back in 1991.

With the exception of a brief spike in mid to late January this year, the wool market has been hovering between 770 and 800 cents per kilogram for the last seven months.

Current prices appear to be representing true market demand.

In the late 80s when the reserve price was introduced, it was first set at 645c/kg, and then it was lifted to 870c/kg, which was a little unrealistic, before finally being set at 700c/kg. Several months on, the trade realised this level was unsustainable, the stockpile grew to more than 4.6 million bales (equivalent to a year’s production at that time) and the decision was eventually made to scrap the floor price.

Shortly after, the indicator fell to 450c/kg, and despite a couple of big spikes, it remained very low for about a decade.

This period saw the demise of many in the wool industry, from woolgrowers through to wool processors.

The market really only recovered once the stockpile was almost cleared.

Not long after it was liquidated, some of the bigger processing/trading companies started to panic, thinking wool would not be available, and so they decided to “buy-up’’ for their plants.

Suddenly, the market indicator then reached all-time highs and it was not too long before “the penny dropped’’ and trading houses realised such prices were not sustainable. People throughout the world were not, and are not, prepared to pay such high prices for woollen products.

Hence the market started to correct, gradually working its way from the 1200c/kg mark to 900c/kg, before finally reaching current levels of about 790c/kg.

In the meantime, some of the companies that purchased large volumes of stock at such high prices have been forced to make huge adjustments, like reducing processing capacity, retrenching staff and, in some cases, closing down altogether.

Several companies (mainly large first and second stage processing businesses), have implemented big changes because they were not prepared for the sudden shortage of wool following the sale of the stockpile.

For years they could keep their machinery running constantly using large volumes of inexpensive greasy wool from the stockpile. This also meant the product was easy to move (post-processing) onto the world market because it was also inexpensive.

When the stockpile disappeared, the wool volumes dried-up and the price increased, which made it harder for trading processors to shift the product (scoured/carbonised/wool tops) post-processing.

Most processing companies were in a position where they had to continue to process at a profit, but trading the product at a loss eventually became too much and many were forced to shut down.

Some companies closed early and managed to sell their equipment just in time, while others attempted to hold-out until they could no longer withstand such enormous losses.

Most big companies recorded massive losses and basically saw the erosion of their profits from the previous decade.

Then there were the very few smaller operations that were commission processors only, so they did not have the burden of having to try and trade the product. Due to their size, they had far less running costs and overheads. This enabled them to survive the entire “storm’’, and now they are positioned quite well due to the sudden shortage of first stage local processing.

For every loser there is always a winner, and on this occasion it is the smaller operators.

This was really a case of the bigger they were, the harder they fell.

It is not always a good idea to look back, but upon this reflection hopefully the industry can learn from the past decade’s events and be better equipped for the future.

There is no question that the setting of the floor price at artificially high levels back in the late 80s/early 90s definitely played a big part in the destruction of many participants in the industry.

Considering there is no longer a stockpile, which hampered any upward price trends, and the fact that we are now dealing with an open market environment of supply and demand, it would seem that the current price position could be a true indication of where the market should be.

Admittedly there are other factors that come into play such as inflation, interest rates and world economies, but it appears that over the past 13 years the average price levels are pretty similar to where they are now.