Situation, outlook and opportunities. for the supply and demand of apparel wool. Report Prepared for the

Transcription

1 Poimena Trust Trading as Poimena Analysis Situation, outlook and opportunities for the supply and demand of apparel wool Report Prepared for the Cooperative Research Centre for Sheep Industry Innovation September 9

2 1. Introduction The global and Australian wool industries have shrunk steadily in the past two decades due to competition from other fibres and other spending priorities for consumers on the one hand and from alternative farming enterprises on the other. This discussion paper provides an overview of the trends in the supply and demand for wool over the past ten years, focusing on wool used in apparel and the situation for the Australian wool industry. The drivers of these trends are discussed to assist the Sheep CRC and others in deciding on programs that may address these drivers. Finally, the prospects for wool over the next 12 months and beyond are presented. Chris Wilcox of Poimena Analysis has prepared this report with assistance from Kimbal Curtis of the Department of Agriculture and Food WA, drawing on data and information from a range of sources, including the International Wool Textile Organisation s Market Information report, papers presented at the Market Intelligence Committee of the IWTO s Annual Congress (of which Chris Wilcox is Chairman), the Australian Bureau of Statistics, the Australian Wool Testing Authority, AWEX, the Australian Wool Production Forecasting Committee and Australian Wool Innovation. 2. Supply Total global wool production and supply has fallen steadily since the alltime peak in 1991 (as shown in chart 1). Between 1991 and 9, world wool production fell by 44%. However, total wool supply (production plus opening stocks) has declined by 55% over the same period, reflecting the sell-off of the large stockpiles that were built-up in the late 198s-early 199s. Current production levels are probably at the lowest level in 7 years or more. mkg clean 3, 2, 2, 2, 2, 2, 1, 1, 1, 1, 1, Production has fallen in almost all of the major wool producing countries over this period. For example, Source: The Woolmark Company, Poimena Analysis. production in Australia, Argentina, CIS, the UK, Uruguay and South Africa have all fallen by between 45% and 6%. Production in New Zealand has declined by 3%. Combined these countries accounted for 6% of global wool production in 8. All have reduced their sheep flocks and wool production as the result of lower wool prices and lower returns from wool production than those prevailing in the late 198s, and more attractive returns from competing enterprises (which vary from country to country, but include grain production, dairy, timber, beef cattle and, most recently in Australia, sheep meat). China is the exception to this trend, with wool production in that country lifting by 7% over the period between 1991 and 9. This reflects the privatisation of agriculture in China, enabling farmers to make their own decisions about enterprise mix, which resulted in a sharp rise in both sheep numbers and wool production due to more attractive returns from sheep. The table presented in Chart 21 on page 13 shows the latest data and forecasts on wool production by major producing country. 198 Chart 1 Global Wool Supply and Production Global Production Global Wool "Supply" (= Production + Opening Stocks) Trends and Outlook for Apparel Wool Page 2 of 16

3 Global production of apparel wool (for which the vast majority of Australian wool is used) has followed a similar trend to that for total wool production, although the fall in both production and supply is greater. Apparel wool production is down by 51% and supply (production plus stocks) is down by 66% (with a 93% drop in the stocks of this wool). This larger decline reflects the importance of Australia as a supplier of wool for apparel (given the 59% drop in production in Australia and the very large stockpile of wool which was held in Australia at the start of the 199s). Australia currently accounts for around 45% of world production of apparel wool, compared with 55% in Chart 2 shows the trends in world supply of apparel wool and stocks of this wool. Since the Australian sheep population peaked at 17 million in 199, a steady decline has continued through to 9 (chart 3). Since 1995, the sheep population has fallen from 12 million sheep and lambs to just 7 million in mid 9. Mirroring this decline, wool production in Australia has declined from 655 million kilograms (greasy) in 1995/96 to a forecast 33 million kilograms in 9/1. Current levels of wool production and sheep numbers are at the lowest level since the 192s. Apart from the decline in sheep number, wool production has also been influenced by: More ewes and fewer wethers in the flock; More younger sheep as a result of emphasis on lamb production and in recent years, the culling of older sheep during drought; More non Merino breed sheep for the production of prime lambs; and Lower fleece weights associated with finer genetics. mkg clean 2, 1, 1, 1, 1, 1, Chart 2 Global Supply of Apparel Wool Production plus stocks Supply Stocks f Source: AWC, SUL, Woolmark, Capewools, FLA, Government agencies, Poimena Analysis Chart 3 Australian Sheep Numbers and Wool Production 1969/7 to 9/1f Wool (mkg greasy) /7 1972/ /76 Sheep 1978/79 Wool 1981/ / /88 199/ / / / Source: Australian Wool Innovation Production Forecasting Committee, ABS, Wool production is shorn wool; sheep numbers is as at 1st July. Updated September 9 2/3 5/6 Sheep (million) 8/9f Trends and Outlook for Apparel Wool Page 3 of 16

4 Trends in the Australian micron profile There have been significant differences in the trends in production of superfine (18.5 µm and finer) and fine (19 µm) wool and those for broader merino wool. In total since 1991/92, the production of superfine wool has lifted by almost 25% while production of fine and superfine wool combined has risen by almost 1%. By comparison, production of medium and broader merino wool (between 2-25 µm) has dropped by 7%. The split of wool tested (equivalent to production) by diameter category over seasons is shown in chart 4. The share of superfine wool (<18.5 µm) and of fine wool (19 µm) has expanded while the share of broader merino wool (22 µm to 24 µm) has contracted. This trend has occurred due to the long period of low prices for broader merino wool during the 199s and into the start of while the stockpile was sold off (much of which was wool in this micron range). At the same time, fine and superfine wool enjoyed significant premiums of the broader merino wool Broader wool (>24.5 µm) have maintained its share in line with the increased production of prime lamb from crossbred sheep. Proportion of wool produced (%) Chart 4 Trends in Micron Profile for Australian Wool % share 1991/92 to 8/ / / / /98 Source: AWTA Key Test Data to 8/9 season. 1999/ 1/2 3/4 5/6 7/8 8/9 >24.5µm 24µm 23µm 22µm 21µm 2µm 19µm <18.5µm The volume of 19.5 µm and finer wool tested continued to rise through to 6/7 despite the declining national sheep flock (as shown in chart 5). In the past two seasons, production of this wool has declined. The greatest declines in volumes have occurred in the mid-micron range between 22 and 24 µm where prices have been low. Wool production (mkg) Chart 5 Volume of Australian Wool Tested by Fibre Diameter Category mkg greasy / / / / / <19.5µm 2-21µm 22-23µm >23.5µm 1/2 3/4 5/6 7/8 Source: AWTA Key Test Data. Trends and Outlook for Apparel Wool Page 4 of 16

5 Trends in the Australian wool exports Australian wool exports have fallen in both volume and value terms over the past two decades, in line with the decline in wool production. Chart 6 shows the volume of Australian wool exports by three micron categories and shows the total change in exports. Exports on a volume basis for fine wool (19µm and finer) rose steadily through to 6/7 where they peaked at just over 164 mkg (greasy equivalents). Broad wool exports have remained steady at around 5 mkg (greasy equivalents) per year, while medium merino wool of between 2 and 23 µm declined due to both the drop in wool production and the sell-off of the stockpile (mainly wool between 2 to 23 µm) by August 1. The trends in the value of wool exports in A$ and US$ in total between 1 and 9 are shown in Chart 7. As can be seen, Australia s wool exports in A$ have fallen from over A$3.5 billion per year in 3 to A$2.2 billion per year now. However, in US$ terms, Australia s exports have been more stable, declining in the past 18 months as the impact of the global financial crisis was felt and when the A$ fell against the US$. They are currently at US$1.4 billion, having reached $2.75 billion in January 8. Chart 6 Australian Wool Exports mkg greasy Within this aggregated trends in the value of Chart 8 Australia s wool exports, there are significant Australian Wool Exports differences between trends in the value by by Micron Category micron categories and in terms of the shares $A for each micron category (see chart 8). In A$ million 1995/96, medium wool between 2 and 23 µm dominated exports from Australia 3 accounting for 75% on a value basis while only 14% of export value came from fine 1 wool (19 µm and finer). In 8/9, medium wool and fine wool contributed 49% and 42% respectively, on a value basis. Over the last 8 years, export value from fine wool has been maintained at around $ 1,m Source: ABS. while export value from medium wool has declined with the reduction in the flock. Wool of 24 µm and broader has an annual export value of about $18-m. Wool export volume (mkg greasy equiv.) 1, 1995/ /97 Source: ABS. $ million /98 US$ 1998/ / /1 1/2 19µm and finer 2 to 23µm 24µm and broader 2/3 3/4 4/5 5/6 Chart 7 Australian Wool Exports $ million A$ 6/7 7/8 Jan-1 Jan-2 Jan-3 Jan-4 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Source: ABS, The Woolmark Company. Data to July 9 Note: Data reflects rolling 12 month aggregates 1995/ / / / / /1 1/2 2/3 3/4 4/5 5/6 6/7 7/8 8/9 8/9 19µm and finer 2 to 23µm 24µm and broader Trends and Outlook for Apparel Wool Page 5 of 16

6 3. Demand While global wool supply and production has fallen, wool has seen tough competition at retail from other fibres and from competing demands on the consumer dollar. Energy costs and electrical goods, in particular, have taken precedence over expenditure on clothing over the past decade or more. As well, the world has been through a period of extraordinary upheaval since, including terrorist attacks (which have caused consumers to be more subdued in their spending), oil and other energy prices reaching record levels, the steady rise of China in prominence in the world economy, natural disasters, a collapse in house prices, and the Global Financial Crisis. Retail demand trends All of this has created a difficult environment for wool consumption in the main consuming countries at retail. Between 1995 and 7 (the latest estimate of Net Domestic Availability reported in the IWTO Market Information Report 8), world wool demand fell by 2% to 1,231 mkg. Given that global wool production has fallen by 9% since 7 and there are little excess stocks of raw wool held in producing countries, global demand is likely to have fallen by a further 9% or so. The leading consuming countries of wool in clothing are shown in Chart 9, both in aggregate and on a per capita basis. The major consuming countries at retail for apparel wool (as estimated by The Woolmark Company) are China, Japan, the US, UK, Germany, Italy and South Korea. Several points can be made: The majority of the major consuming countries at retail are mature, developed markets in the US, Asia and Europe with an ageing population. The high per capita wool consuming countries also have high per capita incomes Many of these countries are currently in economic recession, which is dampening wool consumption as it is constraining per capita incomes. The importance of per capita incomes to the consumption of apparel wool is illustrated in Chart 1. As a general rule of thumb, as incomes rise so, too, does apparel wool consumption. This is borne out by past economic studies, which indicate that consumption of wool clothing is more sensitive to changes in income than to changes in wool prices. Country China Japan US UK Germany Italy S. Korea France Russia Turkey Spain India Australia Chart 8 Per Capita Apparel Wool Consumption Apparel wool NDA (mkg) It is noticeable from this chart that the US is well below the trend line, consuming less wool per capita given its income than may be expected. Trends and Outlook for Apparel Wool Page 6 of Population (million) 1, , Per capita incomes ($US) 5,962 34,99 46,716 35,445 35,613 3,756 27,939 34,45 16,139 13,92 31,955 2,972 31,425 Source: The Woolmark Company, United Nations and World Bank. Apparel wool consumption is apparel NDA at retail average 4-6 from Woolmark (IWTO Market Information 8 report) Income is US$ GDP per head on a purchasing power parity basis for 8. Population data are for 6. Wool consumption (clean kg/per head) Per capita annual wool consumption (kg) Chart 1 Per capita Apparel Wool Consumption vs Income India China Turkey Russia S Korea 5, 1, 15, 2, 25, 3, 35, 4, 45, 5, Italy Spain Income (US$/head) Germany UK Japan France Australia Source: International Monetary Fund and The Woolmark Company Apparel wool consumption is apparel NDA at retail average 4-6 from The Woolmark Company (IWTO Market Information 8). Income is US GDP per head in 8 on a purchasing power parity basis. Trend Line USA

7 Part of the reason for this is that the US has more casual dress standards and its consumers more attuned to cotton than wool. The challenge for wool is to try to influence consumers in those countries where incomes are rising rapidly (eg China, India, Russia) to ensure that the growth in per capita wool consumption tracks towards the levels of developed Asian and Western European countries, rather than the US. An additional point with regard to consumer incomes is that they are probably more influential in the demand for clothing made of fine and superfine wool, mainly because these products tend to be at a higher price point (even at luxury price points) than products made using mid-micron wool. In addition to consumer incomes, another important driver in the past decade has been wool consumption trends in womenswear, menswear and knitwear. The trends (as reported to the IWTO 7 Congress in Edinburgh) are shown in the chart here. The key points are: Wool s share in womenswear fell Knitwear 35% from 27% to 13% (Japan), 14% to 3% Japan 8% (EU) and 12% to 6% (US) in 25% 21% the 8 years analysed. A shift away 2% EU-15 from wool-based clothing (notably 15% 18% suits) to separates and more casual 1% US styles is seen as the cause. 5% 8% Wool s share also fell in knitwear, % although not to the same degree. It was down from 29% to 21% (Japan), from 23% to 18% (EU, although there had been a recovery in the last two years), and from 13% to 8% in the US. In menswear, wool value share had largely been maintained Chart 11 Wool s Value Share Menswear, Womenswear and Knitwear The particular concern for wool is the loss of value share in knitwear as Woolmark Market Intelligence had estimated that knitwear accounted for around 45% of wool consumption by volume. Competition from synthetic fibres, particularly products such as Polarfleece, was a major cause for this loss of share. More recently, anecdotal reports from China and Italy indicate that the wool knitwear sector has been performing better in the past 12 months (in the wake of the Global Financial Crisis) than the wool woven wear sector, possibly as the unit price of knitwear is much less than the typical unit price for wool woven wear (suits, jackets etc). Consumers may have deferred the purchase of the more expensive investment clothing (such as suits etc) but have continued to buy lower priced garments, such as knitwear. While consumer incomes are more influential on demand for wool, the relative price of wool clothing to clothes of competing fibres is nevertheless an important factor in the consumption of wool compared with other fibres. This is particularly so for mid-micron wool (2-26 micron) as products in which this wool is used is often blended with synthetic fibres or are in direct competition with cotton clothing. Woolmark Market Intelligence has previously reported that wool clothing tends to be around twice the price of equivalent clothing of other fibres. In raw form, wool prices are between 3 and 4 times % 3% 25% 2% 15% 1% 5% % Womenswear Japan US EU % Source: Presentation by Chris Wilcox (Woolmark Market Intelligence) at the IWTO 7 Congress, Edinburgh. Based on international import statistics 8% 6% 6 35% 3% 25% 2% 15% 1% 5% % 1998 Japan 1999 EU-15 US Menswear % 14% 14% 6 Trends and Outlook for Apparel Wool Page 7 of 16

8 the price of either cotton or synthetic fibres (polyester staple and/or acrylic). The price of wool compared with these other fibres is discussed in more detail in the Prices section. The relative prices of these fibres are influenced both by demand and by relative supply. Other things being equal, consumers have a preference for wool clothing. Past consumer surveys conducted for The Woolmark Company show that consumers say that they see wool as being higher quality and more prestigious than other fibres and worth paying extra for. However, this strong association for wool may be weakening among consumers (as indicated in a report on the China market in 5 by Woolmark Market Intelligence for AWI). One final trend at consumer level concerns the different demand trends for apparel products of fine wool (19.5um and finer) compared with the demand for mid-micron wool products. There is no quantitative information available on the relative demand, although anecdotal reports from The Woolmark Company and from fabric and apparel trade fairs suggest that there has been a trend over the past decade towards clothing containing fine wool to meet consumer demand for soft-next-to-skin clothing and lightweight clothing, while consumer interest in heavier weight clothing products appears to be waning. Furthermore, there is evidence (again anecdotal and qualitative) that the active leisurewear market is using more fine wool, with marketing by these companies as merino products. Processing demand trends In the past two decades, China has risen to be the world s largest wool processor. According to data from The Woolmark Company (IWTO Market Information 8), China accounted for 32% of the world s wool at the garment manufacture stage in 7, up from 25% in Processing in the rest of East Asia has shifted to China (share falling from 12% in 1995 to 6% in 7), as has wool processing in Western Europe (share falling from 22% to 14%). India s share has risen from 5% to 1% over this period. China s huge wool processing industry services both its domestic market and the major export markets of Japan, the US and, increasingly, Europe. Chart 12 shows these trends. million garments Impact of the Global Financial Crisis on demand for wool Source: Chart 12 China s Wool Apparel Exports Japan United States Of America EU Hong Kong Other China Government statistical bureau The importance of consumer incomes (and confidence) on demand for wool clothing can be seen in trends in the past 15 months in the wake of the Global Financial Crisis. Of the major wool consuming countries at retail all bar China have been in economic recession as the direct result of the shake-out in the global financial system. In part this has been due to a significant drop in consumer demand, particularly in the US, which has hit demand for finished garments from the major manufacturing countries (China, Italy and India). Consumer confidence in these major wool consuming countries dropped to the lowest level for many years. In the US and in the EU, consumer confidence fell in February 9 to the lowest level on record. With the drop in consumer confidence, consumers reduced their spending on all products. Trends and Outlook for Apparel Wool Page 8 of 16

9 The impact on apparel retail sales in these countries is illustrated by the trends in the US (for which recent monthly data is available). This is shown in Chart 13. There is no sign yet of a turnaround in apparel retail sales in the US as we now head into the crucial autumn/winter period. (around 6% of the annual purchase of wool clothing is purchased during the autumn/winter period). % change y-o-y 8% 6% 4% 2% % -2% -4% -6% Chart 13 Apparel retail sales in the US Monthly year-on-year change This decline in apparel retail sales has resulted in a drop in imports of finished wool clothing (imports account for the vast majority of final consumer purchases of wool clothing in the US and Japan, and a rising proportion of end consumption in Europe). -8% -1% Jan-7 May-7 Sep-7 Jan-8 May-8 Sep-8 Jan-9 May-9 Source: US Government statistical bureau, in 5 dollars. Data to July 9 US import data shows that to the end of July 9, the US imports of all clothing was down 5% in volume terms and 8% by value. However, imports of wool clothing were down 1% by volume and 16% by value, suggesting that wool has lost share in the US market. This is expected, given the higher prices for wool apparel. Imports of synthetic fibre apparel into the US were down only 2% in volume and 6% in value, while imports of cotton clothing were down 7% in volume and 8% in value. The drop in US imports has fallen more heavily on Italian-made products, which are more expensive per item and which use higher-priced fine wool, than wool products from China. US imports of wool apparel from Italy were down 31% by volume and 29% by value in the seven months to July 9, while US imports from China were down 1% in volume and 16% in value. The Global Financial Crisis has had a significant effect on demand for wool apparel in general and, given the trends in US imports from Italy, on demand for fine wool apparel. While there are only limited data available on the level of production or orders in the wool textile industries around the world (and notably China and Italy), reports from both countries indicate that the worsted weaving sectors have been hit hard by a drop in orders and production, although activity in China s wool textile industry is being sustained by solid domestic retail demand. The China Wool Textile Association reports that domestic sales accounted for 77% of the production from China s wool textile industry between January and June this year, up 3 percentage points on the level in 8. The Chinese Government programs and stimulus packages have helped boost retail sales, with the sales of men s suits, for example, up 8% in the first six months of 9. This boost in their domestic market has helped offset a 9% drop in exports of wool knitwear and wovenwear from China in the six months to June 9. The Italian wool textile industry has not had the benefit of a similar boost to its domestic retail market. Italy s domestic market, while substantial, is much smaller relative to China s and so the Italian wool textile industry relies more heavily on export demand. According to figures from Sistema Moda Italia, the value of production in Italy s wool textile industry fell 6% in 8, with its export income down by 11%. Exports to other EU countries were down by 9% and exports to countries outside the EU were down 12%. Trends and Outlook for Apparel Wool Page 9 of 16

10 Raw Wool Exports With the downturn in retail demand and, subsequently demand within the wool textile industry, raw wool demand from the major wool exporting countries has turned down. The chart here shows the change in wool exports from the major wool exporting countries in 8/9. There were significant falls in wool exports for all countries, with the exception of South Africa. Demand from South Africa benefited from a relatively weaker exchange rate and, perhaps, increased demand for wool from non-mulesed sheep. Wool exports from Australia were down 8% in volume (in line with reduced production) but 19% in value as wool prices also declined in the 8/9 season. There was 385 mkg greasy exported at a value of A$2.2 billion. In % change yr-on-yr Chart 14 Wool Exports by Major Exporters (8/9 season - % change year on year) US$ terms, export value was down 35% due to the combination of lower volume and the slide in the value of the A$ from almost 9 UScents average in 7/8 to an average of 75 UScents in 8/9. While exports to many destination countries were down in volume terms, Australia s wool exports to China actually lifted by 5% and its exports to India also rose by 2%. In contrast, exports to Italy fell by 4%. The trends have meant that China took 73% of Australia s exports in 8/9. It is also important for most of the other major exporting countries, but its share of Australian exports is by far the highest of these countries. One other important trend in terms of export destinations, is that not only is China the largest destination for Australian wool in total, it is also the largest export destination for fine wool (19 micron and finer), having overtaken Italy in early 4. Reports from the trade, however, indicate that China buys a significant quantity of wool between 18.6 and 19.5 micron, and Italy remains the largest buyer of superfine wool (18.5 micron and finer). The trends in Australian wool exports by micron were discussed in the Supply section. However, one trend should be emphasised. Since the start of the 1995/96 season, the value of Australia s exports of fine wool (19 micron and finer) has lifted by 1% while the volume has risen by 28%. The volume rise simply reflects the increased production of this wool, which in turn has been consumed. In contrast, the rise in value of exports suggests that the underlying demand (which is reflected in the volume consumed AND the price paid) for fine wool has lifted over this period. And this 1% rise is when fine wool prices are at a relatively low point due to impact of the Global Financial Crisis. At the end of the 7/8 season, the value of fine wool exports was up by 38% compared with the start of 1995/96. This supports the qualitative information that consumer demand for fine wool has lifted. Over the same period (1995/96 to 8/9), the value of Australian exports of mid-micron wool (2-23 micron) has fallen by 64%, about the same as the decline in the volume of exports of this wool. 5% % -5% -1% -15% -2% -25% -3% -35% -4% -9% -1% -28% -3% -16% -12% Australia South Africa Uruguay Argentina New Zealand Weighted average Source: Australian Bureau of Statistics, FLA, SUL, Capewools, NZ Meat and Wool Trends and Outlook for Apparel Wool Page 1 of 16

11 4. Price trends Trends in Australian wool prices Australian wool prices in A$ are around 7% lower than year earlier levels, driven lower by the fall in demand due to the Global Financial Crisis. This has led some people to question whether the drop in wool supply in Australia and around the world has had a positive impact on price levels. The beneficial effect of the low supplies is illustrated by comparing the price trends in the past 18 months due to the Global Financial Crisis and the price trends during a similar, but relatively smaller financial crisis a decade ago (see Chart 15). In 1997 to 1998, Australian wool prices were hit by the negative effects of the Asian Financial Crisis. At the time, Australian wool production was at 7 mkg greasy and there was a stockpile of 387 mkg greasy (ie a total availability of over 1, mkg greasy). The Australian Eastern Market Indicator fell from a peak of 83 Ac/kg in September 1997 to a low of 5 Ac/kg in October 1998 as a result of the Asian Financial Crisis. In 8/9, Australian wool production is estimated at a total of 39 mkg greasy with stocks of around 58 mkg greasy (ie a total availability of around 45 mkg greasy). The Australian Eastern Market Indicator fell from a peak of 1,45 Ac/kg in January 8 to a low of 722 Ac/kg in February 9. The decline in wool prices in absolute terms as a result of the two financial crises was about the same (33 Ac/kg), but the price level at the low point in 9 was over Acents/kg above the low point in This illustrates the impact of the low supply level, particularly when one considers that the Global Financial Crisis is far more widespread and deeper than the Asian Financial Crisis. The trends in prices by micron in A$ terms can be seen in Chart 16. Between 1999 and late 1, consumption of fine wool was limited by supply and as a result significant premiums existed for 18 and 19 micron wool. Since mid- 3, these premiums have been depressed by increasing supply. A further feature of these charts is that the premium for 26 micron wool over 3 micron wool has widened since 1 as buyers seek finer wool for interior textile use, notably in upholstery. 2, 2, 1, 1, 1, 1, 1, Jul A cents/kg Source: AWEX Data to 25 th September 9 Jul-1 Jul-3 Jul-5 Chart 15 Australian Wool Prices Eastern Market Indicator trend Asian Financial Crisis Chart 16 Trends in Australian Wool Prices Acents per kg clean Jul-7 Jul Global Financial Crisis A cents/kg clean A cents/kg clean A cents/kg clean 18 & 19 micron 21 & 23 micron 26 & 3 micron 2, 2, 2, 18um 19um 2, 2, 1, 1, 1, 1, 1, Jul-99 Jul-1 Jul-3 23um Jul-5 21um Jul-7 Jul-9 2, 2, 1, 1, 1, 1, 1, Jul-99 Jul-1 3um Jul-3 26um Jul-5 Jul Jul-9 Eastern price guides Source: AWEX Data to 25 th September 9 Trends and Outlook for Apparel Wool Page 11 of 16

12 Chart 17 shows the same price trends, but in US$ terms. The most obvious difference between Charts 16 and 17 is the surge in prices in US$ terms between late 7 and mid 8 when the Australian dollar rose steeply against the US dollar. Prices reached the highest in US$ for many years. For example, the 21 micron indicator hit the highest level since 199. This is important because so much of the trade in wool is written in US dollars. If the A$ had not surged to a peak of just under US$1, then prices in $A for Australia farmers would have been much higher. Current and 1 year averages for AWEX micron price guides (18, 19 and 2 µm) and EMI in both Australian and US dollars are given in the table in Chart 17. Over the 1 years from July 1999, the 18 micron price guide (MPG) has had an average premium of 62% over the EMI, while the 19 and 2 MPGs have averaged premiums over the EMI of 34% and 9% respectively. For the first quarter of the 9 1 selling season, the 18 MPG has been 1112 cents Australian or 921 cents US. For Australia wool producers the 18 MPG is at the 4th percentile, while for processors trading in US dollars, the price is at the 68th percentile across the 1 years to June 9. These graphs and the table show that superfine wool has consistently achieved higher prices than fine wool (2 µm) and the market overall (EMI). Superfine wool should achieve higher prices because it can be spun into finer yarn and so woven or knitted into lighter weight and more luxurious fabrics. Merino wool of around 1, 1, Jul-99 Jul-1 Chart 17 Trends in Australian Wool Prices UScents per kg clean US cents/kg clean US cents/kg clean US cents/kg clean 18 & 19 micron 21 & 23 micron 26 & 3 micron 1, 1, 1, 18 µm is used in outdoor/active leisurewear, one of the few growing segments for wool. It is reputedly popular because of the combination of good performance and a natural, environmentally friendly heritage. Jul-3 19um Jul-5 18um Jul-7 Eastern price guides Source: AWEX Data to 25 th September 9 Jul-9 1, 1, Jul-99 Jul-1 Jul-3 23um Jul-5 Chart 18 Average and Current Micron Price Guides and EMI Australian and US cents 1 year average (July 99 to June 9) Australian cents US cents July September 9 average Australian cents (percentile) US cents (percentile) Average price premium to EMI Eastern price guides Source: AWEX, Pacific Exchange Rate Service 18 MPG (4%) 921 (68%) 62% 21um Jul-7 Jul-9 19 MPG (36%) 81 (81%) 34% 1, 1, Jul-99 Jul-1 Jul-3 2 MPG (44%) 689 (75%) 9% 26um 3um Jul-5 Jul-7 Jul-9 EMI (55%) 663 (8%) Trends in competing fibre prices The relative price for wool against those for the major competing fibres (cotton, polyester and acrylic) is an important factor in the demand for wool, and in particular in the demand for midmicron wool (2-26 micron). This wool is often used in blends with polyester staple (for woven fabric) and acrylic (knitted fabric) to meet particular price points. As well, these products often compete directly with similar products made from cotton. Therefore trends in wool prices relative Trends and Outlook for Apparel Wool Page 12 of 16

13 to these fibres is an important factor in the decisions of mills, in terms of the blends they use (6% wool, 4% synthetic; 5:5 blend etc) or the type of product they produce. Chart 19 shows the price relativity of 21 micron wool against that for cotton and synthetics. The horizontal lines show the 1-year averages for the two ratios. As can be seen, 21 micron prices in US$ are currently at the long term average compared with cotton and synthetic fibres, suggesting that this wool is competitively priced. Price Ratio Chart 19 Wool s Price Competitiveness US$ terms Against cotton Against synthetics. Jan-98 Jan- Jan-2 Jan-4 Jan-6 Jan-8 Source: AWEX, Cotton Outlook, PCI Fibres, CIRFS, Woolmark Market Intelligence Data to August 9 Wool prices versus farm prices for other enterprises One of the reasons for the decline in wool production in Australia (and in other major wool producing countries) is that wool price and the returns to woolgrowing have not been as strong as that for other agricultural enterprises. Chart 2 shows the trends in prices for a range of Australian livestock products. As can be seen, wool prices have remained at around the same level througout the period. In contrast, the prices for beef and, in particular, sheep and lambs for meat, have risen very strongly since /1. Given this incentive, sheep producers in Australia are shifting their focus to producing sheep for meat, rather than wool Chart 2 Prices for Australian Livestock Products Index: /1=1 Index: /1=1 24 Beef Lamb Mutton Wool Live sheep f Source: ABARE, AWEX, Updated 2 nd September 9 Trends and Outlook for Apparel Wool Page 13 of 16

14 5. Forecasts and Issues Supply forecasts World wool production is expected to fall again in 9/1, based on the available forecasts from the major wool producing countries. Global wool production is expected to fall by around 1-2%. Details are shown in Chart 21. Notable changes predicetd in production for 9/1: an 8% fall in production in Australia; a 16% rise predicted for New Zealand by Meat and Wool NZ; a 6% fall in Argentina; and a 1% decline in Uruguay. Given the relative strength in prices for competing agricultural enterprises and the low sheep numbers in many of the major wool producing countries, it seems unlikely that wool production will recover quickly in the next 2-3 years. However, Meat and Wool New Zealand s recent forecast that wool production will lift by 16% in 9/1 suggests that a fast recovery in production is possible with favourable seasonal conditions resulting in improved fleece weights. In Australia, while total shorn wool production is predicted to fall to 33 mkg greasy, there are very different trends expected by micron category (see Chart 22). The Australian Wool Production Forecasting Committee predicts that fine and superfine wool will see the largest declines, down 14% by volume, in 9/1. The Committee predicts that production of superfine wool will drop by 18%. This reduction is due to a combination of better seasonal conditions in some areas, greater use of terminal sires and a focus by growers on a combination of fleece and body weights. Mkg clean Australia China New Zealand Argentina Uruguay UK South Africa Others Global Chart 21 World Wool Production mkg clean Source: Market Intelligence Committee of IWTO, Poimena Analysis, Australian Wool Production Forecasting Committee, FLA, SUL, Meat and Wool NZ In contrast, the mid-micron wool category is expected to fall only 6%. Production of cross-bred wool (24.6 micron and broader) is also expected to see a decline smaller than for the total production (down 7%). If these forecasts prove correct, then the excess supply seen for superfine wool may start to moderate, helping prices for these wools. However, in the first two months of the 9/1 season, tests of wool of 18.5 micron and finer are unexpectedly up by around 18% / ,181 % 25% 15% 14% 4% 3% 2% 2% 36% 1% 8/9e ,9 % 24% 14% 12% 4% 3% 2% 3% 38% 1% % change -1% -11% -19% -2% -7% -2% -2% -2% -8% 9/1f ,8 % 22% 15% 13% 4% 3% 2% 3% 39% 1% Chart 22 Australian Wool Production Trends By micron category mkg greasy 3 Source: AWTA, AWIPFC (July 9) -14% 4/5 5/6 6/7 7/8 8/9 % change -8% % +16% -6% -1% -3% +1% -2% -1% Total shorn wool (mkg greasy): -6% (-7%) 9/1(f) 33 (-8%) 19.5um & finer um 24.6um & broader -7% Trends and Outlook for Apparel Wool Page 14 of 16

15 Demand forecasts There is now a more positive outlook for the world economy and for the economies of the major consuming countries, although risks remain. The recession in the US appears to be nearing an end, and the economy is expected to recovery over the next 12 months, albeit slowly. The Japanese economy, too, is expected to begin recovery soon. The recovery in the major wool consuming countries in Europe is delayed by comparison until sometime in early 21. A good indicator of future economic performance of these developed economies is the OECD Leading Indicator. Chart 23 shows the leading indicator graphed against fine wool prices in US$. As can be seen, there is a good correlation between the trends in the leading indicator and fine wool prices. The chart shows the downturn in the leading indicator as a result of the Global Financial Crisis but now shows a recovery is on the way. This is good news for fine wool demand. China s economy has been performing well, although there are some recent signs that the economic growth rate is starting to moderate as the Chinese Government s stimulus finishes. Even so, its economy is expected to grow at 8.3% in 9 and 9.4% in 21 (Consensus Forecasts, September 9). Chart 24 shows the expected trend in economic growth in the major wool consuming countries weighted by wool demand. The large and sharp drop in 8 and 9 is a significant indicator of the impact on the demand for wool clothing in these two years. Note that the drop is far deeper than the low point in 1998 in the midst of the Asian Financial Crisis. Chart 23 OECD Composite Leading Indicators v. Australian fine wool prices 9 3 Jan-92 Jan-94 Jan-96 Jan-98 Jan- Jan-2 Jan-4 Jan-6 Jan-8 Jan-1 Equally notably is the expected sharp % recovery in economic growth in % This is a very positive sign for demand for wool clothing in these markets in 21. A Source: Note: word of caution is that unemployment levels in several of these countries is still rising and will remain high for some time. This will dampen consumer spending. index Composite Leading Indicator* 19 micron wool price Source: OECD, AWEX * Amplitude adjusted form of the CLI for the whole OECD region. CLI to July 9 pushed out 8 months. Wool prices till w/e 25 th September 9 7% 6% 5% 4% 3% 2% 1% US$/kg clean 12 Chart 24 Economic Growth in the Main Wool Apparel Consuming Countries Weighted by wool consumption % change y-o-y f 21f 211f IMF, Consensus Forecasts (August 9) and Poimena Analysis Economic growth in China, Japan, USA, UK, Germany, Italy, France and South Korea, weighted by apparel wool consumption (from Woolmark/IWTO) The expected recovery in economic growth should hep boost demand for finished wool clothing from the major processing countries and should help demand for higher priced, higher quality wool apparel from Italy. This should bring some recovery for the Italian wool textile industry. Signs of this recovery were tentatively reported at Premiere Vision Autumn/Winter 21 (held between 15 and 18 th September), with better orders and interest in wool apparel. Trends and Outlook for Apparel Wool Page 15 of

16 While this will help boost demand for raw wool from Italy, China will remain the dominant buyer and processor of apparel wool, particularly from Australia, for the foreseeable future. Its advantages of a still low cost labour pool and the largest retail market for wool apparel, with its growth potential, should see its processing industry remain the dominant partner for Australian wool. Prospects for wool prices With demand for wool apparel likely to pick up in 21 this should bring an improvement in raw wool demand. Given that world wool supply will remain very low in 21, prices are likely to pick up strongly in 21. ABARE, the Australian Government s commodity forecasting bureau, predicts that the Eastern Market Indicator will average 84 cents/kg in 9/1 season, up 6% from the average of 792 cents/kg in 8/9. Given that supply is so tight and that the EMI is already at 846 cents/kg (week ending 25 th September 9), ABARE s forecast appears to be conservative. The Eastern Market Indicator could average higher, possibly between 88-9 Acents/kg. The rise should be seen for all microns, with possibly a larger rise in fine and superfine wool prices once Italy starts to buy more wool and assuming that the Australian Wool Production Forecasting Committee is correct that the supply of superfine wool will fall by more in 9/1 than for other wool. Opportunities for apparel wool While the demand prospects are positive due to a recovery in the economies of the major consuming countries, there are reasons to believe that wool has a strong future: Wool is a unique fibre. While its performance may be copied by synthetic fibres, the 'wool story' can not be duplicated of a naturally, sustainably grown fibre in pristine environments. Wool needs to work to ensure that this story can be sustained and not compromised. Animal welfare issues that have arisen in the past five years is an example of how wool must be vigilant and address such concerns through market-focused responses (including, for example, the National Wool Declaration), Consumers that will pay for this provenance do so in higher-priced garments, not in everyday 'commodity' garments (e.g. blends), Fine wool (finer than 19 micron) is where demand has been strongest over the past decade and this is where the demand will remain strongest. It has the comfort to be next to skin and can be used in a range of end products, from suiting fabrics, to casual knitwear to active leisurewear. This is also where Australian wool production dominates world production, with an estimated 9% of world production. Active/leisurewear demand from consumers is likely to continue to grow and wool s use in this sector is likely to grow. As developing countries urbanise, there will be a growth in the number of people with leisure time and money to spend on themselves. Outdoor activities is an opportunity for fine merino wool, and If marketed successfully, top-end woven suiting fabric will grow with urbanisation of developing countries, particularly in the more formal-dress countries of east Asia, notably China. There is a risk that China and other developing countries will follow the American dress styles as their incomes grow (see Chart 1), which will diminish this potential. The high value luxury end sits at the peak of a broad pyramid of consumers buying lower priced garments (eg mid micron wool, blends, un-branded copies) that are still seeking the quality image that wool provides. Sustaining this sector requires shoring up the quality, high value image of wool apparel among consumers. Trends and Outlook for Apparel Wool Page 16 of 16