Disappointingly large and negative price movements across the offering was unfortunately the result again at Australian wool auction sales this week. Price falls were significant and an average of around 5% was lost from clip values. As the past six or more years have seen price gains predominantly on the back of demand, similar-ly this rapid retraction in price levels is being caused by the slowing of buying by mainly Chinese manufacturers. All types and descriptions were affected, but once again the super fine (less than 18.5 mic) end of the Merino sector and all carding types were hardest hit.

The Australian Wool Exchange (AWEX) Eastern Market Indicator (EMI) closed the week at 1874ac clean/kg. which was 4.87% or 96ac lower. In US Dollar (USD) terms the indicator was more so affected as the AUD weakened against the USD on a week to week basis. The USD EMI lowered by 5.6% or 79usc lower to finish selling at a level of 1326 usc clean/kg.

Whilst it is clearly not that easy to explain or predict why markets of any product react in the way they do, on the surface the current wool market behaviour seems to be going against the most logical of thinking. Supply is forecast to be in serious decline and demand for wool products, in particular Merino, at retail and consumer level remains strong, yet the market has taken this downturn.

Demand is the key price driver and the most substantial barometer for a product like wool. Supply issues, although influential at various pinch points in time, at both the high and low end, is very much secondary as far as price determination is concerned. Someone, somewhere has to buy the product at a price in order for that supply to inevitably be used and for wool to be pulled through the pipeline.

The most popular of reflections this week as to why the price fell so hard was the simple fact that exporters to China were experiencing very limited inquiry for new business and any new forward contracts were extremely hard, if not impossible, to come by. Some pre sale discounting in forward levels being offered into China were being reported and this provided the inevitable feeble lead in to the start of auctions. This languid atmosphere then compounded as selling progressed and the first day closed under a very sombre tone, as more and more buyers withdrew almost entirely from their nor-mal purchasing operations.

From the other side of the industry, information from manufacturers is that the prevailing high prices of the past months has proven problematical to pass on through to retail. As the price moved so swiftly upward through the course of last season (up over 500c) , the manufacturers were able to use a two to three month average( length of supply chain) price to sell out the other end so the top of the market price was no gauge as to the ability of the current price of wool being able to move all the way through to consumer.

Interesting to note though was that the machinery demand in China has actually grown this year, with installation of even more wool processing capacity into some parts of that country. This seems to go against the trend as it was commonly thought that high labour rates and higher associated running costs had some Chinese manufacturers looking at other countries for some first and second stage manufacturing opportunities. Given the trade disagreements with the USA, those discussions may be being further hastened. What has changed now though is that factories are prepared to sit out and leave machines idle rather than running machines at a potential loss. How long that can last is the great unknown.

Next week sees over 40,000 bales being offered to the trade. The slightly better tone to the market that was seen on the final day needs to strengthen in order to arrest the current negativity.

Wool forwards report - SA (Southern Aurora) Markets

Uncertainty has driven the spot market for the key 21.0 micron price guide (MPG) down 93 cents to 2158 over the last three trading days and 196 cents of its peak of 2354 in August. Forwards traded early in the week at 2185 for November to a low of 2120 before rallying to trade at 2150. The depth of the current retracement is the difficult thing to predict and highlights the need for growers to have a strategy to manage this risk.

The current rally has now run almost 3 years (roughly 300 trading days). Since 1995 we have only had two other rallies of this length. These occurred between 1999 and 2002 (351 trading days) and 2008 to 2011 (286 trading days).

We currently sit right in between these two numbers. Options are divided. Will see a further retracement similar to the price action we saw in June 2015 when we saw the market give back 24 percent or nearly 300 cents (1505 to 1214) before embarking on the current bull run. This would see the retracement continue through to December. Has the market done enough work and we will rally sooner and possibly look to a new peak. More importantly to con-sider is has this rally end and has the longer deeper commenced.

History will show that these long term rallies have an end point. When this current rally will finish is impossible to predict but the current drought and tight supply could extend the timeline. The lack of participation in the forward markets is also adding to the spot volatility. All sectors of the pipeline need to address this to delivery some degree of certainty and margin management.

AUD Commentary - SA (Southern Aurora) Markets

This week the Australian Dollar seemed to be somewhat immune to calamity going on in the global equity and bond markets, trading in a relatively tight but erratic range this week. On Monday the AUD opened at 7110, before dropping to a midweek to a low of .7052, and lifting today (Friday) to .7084. The AUD found sup-port at lows as bulk commodity prices defied the rest of the market and moved higher. The benchmark Iron Ore Price has entered a bull market, climbing 20.4% from the 5th July. Analysts believe there maybe more upside in these markets following news that the value of Chinese fixed-asset investment projects more than quadrupled from the levels seen in the three months to June. Richard Grace, Chief Currency Strategist at the Commonwealth Bank said “the AUD also drew support from a weaker Euro , while the AUD also recorded strong gains against the British Pound over the ongoing Brexit dramas”. Data out of Australia continues to confirm the economy is growing slowly, however low inflation, low wages, falling house prices and high debt is likely to see the RBA stay on the sidelines for the next 12 months with regard to any move on local interest rates.

Technically the AUD is holding support at the lows, and has seen several bouts of buying around .7050, prompting traders to look to where they can buy the dip, especially as some believe the Aussie is oversold. However any rally is likely to be short lived and held by resistance at .7165, and then .7240. On the downside, break of the previous low of .7040 will see the market slide to the next support at .6990 and then .6885.