Weekly Market Wrap

Adrian Field Trading Manager

With Adrian Field, Melbourne
Assistant Trading Manager

October 24, 2003

Wool industry 'feeling the pain'

THE eastern indicator is nearing the 800 cents per kilogram mark after falling 28c/kg to close at 810c/kg this week.

Whilst most other commodities continue to strengthen, wool prices continue to fall.

Obviously this is becoming very frustrating and painful for many in the industry, particularly fine wool growers and producers whose income comes solely from wool.

There are also many exporters and processors feeling the pain, and some will not survive the ongoing hardship.

A large number of importers are attempting to renegotiate or cancel contracts completely now that the value of the wool they purchased earlier is declining rapidly.

The cost to the exporter of holding potentially cancelled wool in overseas ports is enormous. Add to interest and storage the actual loss in market terms for a two-month period, and combine this with trying to re-sell the consignment on a falling market and imagine the response. That's right, a very big discount or no offer at all.

Let's look at one contract for 12.5 tonnes of 21 micron clean fleece wool at 980c/kg (666c/kg greasy). $122,500 plus transport, dumping, freight/shipping, interest and insurance. We are now looking at about $130,000. The best offer now is probably 850c/kg, which equates to $106,250, and don't forget that interest and storage costs continue to rise - hence an instant loss of $25,000 and climbing. Also don't forget that this is 12.5t, not 100t, which is often the case.

Taking the agent and/or client to court for reneging could be suggested. But good luck - they need to be found first, and if they are, well, there's always bankruptcy.

For processors, their market share continues to fall as wool volumes and business volumes continue to decline - commonsense.

A commission processor is continually reducing their rate to try and entice prospective clients. Often a tariff war begins, and it can get to the stage when nobody makes any money - they are just operating the mill to cover costs. This is when quality comes into the equation, and if a mill doesn't process the wool properly or up to the client's standards, then look out, they can receive claims or just lose market share.

Exporter/processors will try to juggle processing commitments with selling strategies, which, as you can imagine, can be quite complex. To put it simply, if the exporter/trader continues to lose money on sales just to keep the mill running/surviving, then there's only one thing that will happen - they will shut down the mill and possibly the trading arm too.

A company can only lose massive amounts of money before the inevitable happens.

So this is a very small insight into the risks for exporters and processors. Other members of the industry, additional to growers, also suffer during these times.

The market could continue to fall further, but the expectation is not much further.

It's interesting to note that stocks in woolbrokers' stores now total more than 650,000 bales and are climbing. Large portions of this wool were in store when the indicator was around the 1000c/kg mark.

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