Australian Wool Innovation Limited : Wool market review - week ending 24 January 2014 (Week 30)

January 24, 2014 at 03:48 am

MarketScreener.com By

Sale Week 30: Fri 24th Jan 2014

OFFERING
Bales offered	42,906
Passed-In (%)	6.7%
Re-offer (%)	7.0%

AWI COMMENTARY

Australian wool auction markets staged a significant rally in prices this week across all types and descrip- tions, backing up the good demand signals exhibited on the final sales day last week. This strong and competitive market situation was supported by a much lighter volume of bales on offer, particularly strong indent orders from one of the larger Chinese operators and forward selling exporters keen to execute orders prior to the Chinese shutdown over their New Year period. Buying interest from Europe and India continues to add valuable support to the market. The AUD:USD exchange rate continues to sit around 88 cents and traded in a relatively narrow band of around 60 points during the selling period. It appears these days, the stability of the exchange, rather than the rate of exchange, assists the wool markets more as far as confidence is concerned.
In what is considered a rare event, the market for every type on offer this week acted in concert, with pric- es concluding the series at levels 20 to 30acents clean/kg higher across the entire selection. These rises virtually wiped out the losses of the previous sales week. Obviously the percentage gains were stronger at the lower priced end of the spectrum, indicative that the global wool users are currently keen to also source some quantity at the cheaper end of the raw material supply chain.
For what has seemingly become a trend over the past few weeks since the Christmas recess, the better Superfine Merino fleece sector of 18.5micron and finer has proven to be the most resilient, and price gains have occurred in consecutive weeks. The reduction in availability of these types is concerning the usual buyers of these wools as the likelihood of less strength and lower style becoming generally more prevalent in the Australian wool clip over the next 4 to 6 months is being realized.
A slight pull back was witnessed in the Merino fleece sector of wools broader than 19.0 micron on the final day, but these were minor in magnitude and predominantly restricted to the lower end types, as talk of difficulties
of getting new sales into China and payment receipts slowing started to play on the local auction buyers' thoughts. With the high cost of stocking wool locally, buyers are reticent to carry too much inventory through the China New Year period, as quite often the payment schedules are put back or delayed 2 to 3 weeks, restricting the buyer's ability to participate fully in the local market.
It is assumed that the next few weeks of selling will be somewhat affected by a general inactivity from China as they will be in holiday mode. The market and buying patterns of our major purchasers are signalling that de- mand is inherently strong, as does the strong presence of wool content in the latest fashion ranges released at trade fairs in Europe. Whilst the next few weeks may see prices struggling to maintain their levels, the short to mid term outlook is reasonably positive, with some trade participants bullish in their forecasts.

Sale week	2013/14 forecast	2012/13 actual
Week 31	38,948 bales	39,993 bales
Week 32	47,941 bales	53,518 bales
Week 33	51,077 bales	49,426 bales

COMMENTARY FROM ICAP

ICAP Wool bids and offers trended higher across all microns early this week, as buyers reported continued good European Wool enquiry, on top of reasonable Asian business.

The weaker Australian Dollar has assisted in these firmer prices, trading lower and falling below the old support of 88 cents. Although, it remains to be seen whether this trend con- tinues, as the Australian CPI Inflation numbers surprised with a strong rise, and would suggest that we may have seen the last of the easing policy by the RBA.

In the below chart, we see a remarkable line of price re- sistance to any rise in the EMI in USD. Should that continue, it might call into question the next move in wool prices.

We note that over a long period of time, the EMI in both the USD & AUD tends to generally track in the same direction. However there is currently a substantial divergence, and the worry is that the wool price in AUD might be about to have a correction lower. That does not mean that prices must fall. It's just that the majority of commentators, buyers and traders expect higher wool prices and a falling AUD, and have their trade books biased to this, and as is often the case when pretty much everyone thinks it's going higher, the market of- ten confounds by doing the opposite.

Certainly the fundamentals of limited supply, growing demand and a falling AUD still support a rise in wool prices, and

should the prices in the chart below break above the long downtrend line, then it suggests we should be in for another solid rally. In times of uncertain market conditions as we now

have, it might be prudent to look to reduce price risk, and for woolgrowers this could be easily achieved by the simple pur- chase of a Wool Put Option.