Merino costs rise as manufacturers move into high value products.
Wool prices have surged this year, rising 45.7 percent with the average EMI (Eastern Market Indicator) going from US$8.05/kg to US$11.73/kg by the end of July. It is the highest level since 2011, according to AWI (Australian Wool Innovation Limited).
The price spike is mainly for super fine gauge merino wool, with the margin between fine and coarse crossbred wool expanding from 10 percent to 25 percent over the past six months. The increase in wool prices has been further exacerbated by the strength of the US dollar.
Industry analysts predict that the current price momentum is more sustainable than the 2011 spike, since it is backed by solid, ongoing demand from China.
“It looks like supply and demand are in reasonable balance, if anything demand is slight stronger,” said Dr. Peter Morgan, executive director at the Australian Council of Wool Exporters and Processors, discussing the situation with local media.
“China is the world’s largest woolen product manufacturer and consumes around 400,000 tons of greasy wool a year. However China can only produce around 100,000 tons domestically and Australia is only able to supply 150,000 tons of scoured wool a year, so there is still a gap to fill up,” said Wang Qiang, China manager at Australian Wool Testing Authority.
Strong Demand for Finer Wool
Due to high stock levels and low price/margins in the crossbred business, a number of first and second stage processors have converted their machinery to be able to accept Merino wool. Changing machinery requires a large capital investment and thus mills who have made this change are motivated to keep their factories running at full capacity. This in turn has created what is referred to as “machinery demand” for Merino wool, as more Merino is now required to keep these machines running.
“Wool prices have risen more than 40 percent from last year. For extra fine micron, such as 17.5 or 16.5, the price has gone up almost 50 percent this year. For 19 micron, it has increased roughly 35 percent, ”said John Liu, executive vice president at Zhejiang Xinao Textiles Inc.
However, most buyers are expecting yarn prices to remain flat or inch up slightly. This has left suppliers to find a way to digest raw materials price increases.
“Even though materials prices went up, we cannot simply increase our FOB price for the final product. In that sense, it is a tough year for us,” said Mr. Liu at Xinao.
The demand for crossbred wool remains at lower levels for all wool broader than 30 micron, but the large volumes of stocks are being depleted due to clever blending of synthetics back into wool yarns. Crossbred wool of 27 microns and finer has been blended with much finer Merino (as fine as 16 micron), a special technique that creates blends with a “fake fur” look.
Export Demand Keeps Prices High
In the January to May 2017 period, the total volume of raw wool imports fell 7.0 percent to 13.9 million tons, while the value rose 13.25 percent to US$1.18 billion pushing the average unit price to US$8.52/kg, up 21.83 percent from 2016 levels.
During the same period, China’s total exports of woolen products reached US$4.61 billion, up 19.22 percent over the same period last year, driven by knitted and woven apparel.
“The demand from China is growing. China has a big middle class of around 400 million people and that number is growing. This will drive future wool consumption,” said Mr. Wang speaking at a China Wool Textile Association conference.
Despite growing domestic demand, most of China’s wool consumption is used for export products. Although consumption for products sold into the domestic market experienced double-digit increases since 2014, it still accounts for less than 2 percent of total fiber usage.