Monthly Market Reports

October 2012

23 October 2012

This month we provide some context for the current wool prices in Australia and summarise relevant trade and financial news.

Current wool prices in context

Current wool prices are a challenge to all, and the price decline since Autumn 2011 has been disappointing for many. With this in mind, it is useful to consider how the price of wool fared relative to other major Australian export commodities since the peaks achieved in the February-June period of 2011.

The chart below shows monthly price movements for Australian trade lamb (Eastern State Trade Lamb Indicator or ESTLI), cotton (Cotlook A index), iron ore, and wool (AWEX EMI), expressed relative to the individual peaks achieved in the period from February 2011 to the present.

The data shows that the price of wool has held up comparatively well. While the AWEX EMI is down 476 AU cents/kg clean (34%), trade lamb is down 242 AU cents/kg cwt (37%), cotton down 151 US cents/lb (65%), and iron ore down 90 AU dollars/ton (48%). Expressed as an average price level over the period compared to the individual peaks, lamb is down 23%, cotton down 49%, iron ore 22%, and wool 15%.

All of these major export industries are being affected by global economic factors, especially the economic uncertainty and slow-down in Europe. In particular the slowdown in Europe is affecting China’s export markets for wool. From January to July 2012, China’s wool top exports to Europe, which accounts for 40% of China’s total wool top exports, were down 37% year-on-year. Exports of knitwear were down 8% overall, with exports to Europe down 29% year on year.

International news snippets

US retail recovery continues: On October 15, the US Census Bureau released advanced estimates of US retail sales for September. Retail sales were up 1.2% from August 2012, and up 5.3% year-on-year. Clothing retail is one of the better performing sectors – calendar year-to-date sales of clothing and clothing accessories are up 6.1% compared to the same 9-month period last year, and home furnishings up 8.8%.

India passes key legislation: Despite political pressure and major strikes across the country, the Indian parliament passed the controversial Foreign Direct Investment (FDI) reform policy on 20th September. This policy will in the long-term provide a major stimulus of India’s retail sector and clothing brand space by allowing foreign companies to hold majority stakes in multi-brand retail outlets. Immediate beneficiaries will be the major ‘hypermarket’ chains, such as Wal-Mart, but in the longer-term, the overall impact will be similar to that seen already in other BRIC nations such as China, where consumers have been provided access to a wider array of higher quality international products – especially in the premium apparel brand space, where Australian wool generally resides.

European debt crisis receding? On September 12, German Constitutional Court dismissed a constitutional challenge against the legality of the Eurozone's new bailout fund, the European Stability Mechanism (ESM). Had the court ruled against the ESM, the viability of the fund, which is crucial to providing supports to weak economies on Europe's periphery, would have been thrown into doubt. Also, on September 6, the European Central Bank (ECB) announced that it was prepared to purchase the government bonds of countries facing soaring yields owing to a loss of market confidence. This has already had the effect of reducing Spanish and Italian borrowing costs (as measured by soverign bond yields) since the announcement – with for example, Spanish two-year bonds dropping 4% since the announcement.