Australian wool auctions resumed this week after a three-week break in sales. A lacklustre opening was initially the trend but positive momentum then proceeded to build, thus carrying the market into positive territory by the close. The AWEX (Australian Wool Ex-change) EMI (Eastern Market Indicator) improved by 9ac from the July closing level to 1990ac clean/kg. The EMI expressed in USD gained even more and added 18usc for the week to close at 1481usc.

The lack of sale opportunity over the last three weeks had seen a small build up in wool supply locally needing a new owner. Subsequently we saw just under 50,000 bales being offered to the trade, which in the end, was easily absorbed into buyers inventories at good prices. Leading the price gains were Merino fleece and skirtings finer than 20 micron which showed impressive gains of between 25 to 80 ac, with the 18.5 micron area the largest beneficiary. Broader Merino fleece types sold 10ac lower generally. Cardings sold 20ac higher but crossbreds depreciated substantially to trade 35 to 70ac lower.

Interesting this week was the clear evidence of European buying leading the market on the better specifications types at the finer end of the Merino offering. The strong support on these wools, from both the usual Italian operators and forward sellers eventually forced Chinese buyers to accept that the price was falling away no further for the time being and they needed to join in to secure immediate supply requirements.

The foreign exchange (forex) rates of the USD (US dollar) versus the CNY (Chinese yuan) continues to be the major influence in a much of the negative sentiment around the wool price emanating out of China. That rate has seen the value of the USD appreciate by almost 10% against the CNY in just a few months. In the meantime, the USD versus the AUD rate has remained very stable trading in the .7361 to .7465 range for two months, giving no relief at all on the cross rates to Chinese wool traders and manufacturers.

What is affecting supply at the moment is the fierce drought that continues to bite across many of our wool growing regions. With the wool prices and sheep meat values being in such a good state at the moment, sheep farmers have been resolutely retaining their core breeding stock at least, which normally wouldn't be affordable on past market prices during drought. It cannot be underestimated the damage to supply this will cause in the short term, but if there is no break before too long, this will only get exponentially worse for the longer term.

Next week sees auction quantities drop substantially to just over 37,000 bales. Looks like a dearer trend is now in play so hopefully we can see handy price gains to help alleviate drought affected growers feeding costs to help ensure future wool production.

Wool forwards report - Southern Aurora Markets

The forward markets traded thinly over the recess with the indication that the spot auction would open under pressure. This played out with all qualities 20 to 30 cents cheaper on Tuesday. The market quickly found a base and closed the week having recovered the lost ground. The forward market showed a similar pattern. Stabilization in the spot market saw interest along the forward curve increase with trading out to August 2019. Solid prices were received for the new year with 19.0 peaking at 2100 cents for February and 21.0 trading above 2000 cents out to May.

Whilst prices are inverted (discounted to the spot market) they still represent historically high hedging levels. This invert is driven by the inability of the processors to pass the current raw wool costs down the line. There will be demand destruction at current price levels but supply concerns mask any impact to date. We expect this situation to play out in the short term but the risk of the market fatiguing increases as we move forward into the new season.

AWTA Key Test Data as at end July 2018

The monthly comparisons of total weight for July 2018 compared with the same period last season show are decrease of 0.3% year on year.

AWTA Ltd has tested 16.9 mkg (million kilograms) this season compared with 17.5 mkg for the equivalent period last season.