Australian auction sales produced dearer results this week across the majority of wools on offer. Merino fleece of all qualities were the recipient of the largest of rises. Gains of 30 to 40ac were commonplace in a very competitive environment  which had the main Australian trading houses leading the buyers lists. Chinese indent buyers and a few of the top makers gave strong support but their purchasing activity dropped off on the final day somewhat as the first day saw levels rise above their reach and that of their clients ability to convert.

The AWEX (Australian Wool Exchange) EMI (Eastern market indicator) gained 19ac or 1.2% this week to close selling at 1574ac clean/kg. A weaker AUD (Australian dollar) against the USD (US dollar) eliminated almost entirely the impact of the AUD gains. The USD EMI gained just 2usc or 0.2% to close at 1070usc clean/kg with an unchanged result the net effect for those overseas manufacturers using USD for buying on an indicator only assessment. Isolating the merino fleece types though, there was a general 1.2% appreciation in the USD values.

The oscillating wool market continues unabated. Recently we have seen the fortnightly changes reduced to weekly movements and now day to day appears to be becoming the norm. Since the first week of September 2019, the market has behaved in this micro cyclical manner and if you happened to be selling on the "good" week or day, 50ac differentials in clip returns could have resulted. This highlights the higher than normal passed in percentages that have featured at auctions through the first quarter of this season.

Most of this volatility is stemming from the very short supply chain we are operating to at present with prompt demand being satisfied by hand to mouth buying and processing. Six to eight weeks from auction to shelf is now the general routine for wool products from auction sale in Australia to on shelf at retail for most of China delivery.

When the factories are ready to buy it seems there is a need for operators to have stock on hand at the "right" price or a very large appetite for risk to sell forward for relatively prompt shipment without cover. A finite volume of new business appears to be available fortnightly to tri weekly. Most of those demands are being met and financed by exporters, but the outstanding uncovered needs are then put into the indent operators hands to fill the factory orders.

When the prompt volume is satisfied and contracts have been executed through auction, a reversion to caution appears. A general lack of willingness to carry too much inventory due to losses incurred through the big drop of August 2019 prevents any sort of stabilization of price levels. A price drop then eventuates and some stock manoeuvres is then considered lower risk and therefore some minimal inventory without a sale is undertaken.

The upcoming three week break in sales without access to any significant volume of wool, may see some market behaviour change. Anticipating needs for deliveries post the Chinese New Year break in late January may prove advantageous. Normal patterns show that shearing slows significantly for a few weeks over the Christmas/New Year period. On top of that,  volumes are already looking like being at least 10% lower this season so supply factors will have a larger chance to force itself on price.

Next week has a large offering of over 40,00 bales set to go to auction and combined with the soft Fremantle close, the market looks set for a test of its resolve to settle.

Southern Aurora Markets - Australian Dollar commentary

The Australian Dollar opened at the week’s high of .6865 and edged quietly lower in the early part of this week, before tumbling on Thursday to a low of .6768 after the release of Australia’s weak Employment Report. This was the first net negative month of 2019. AMP Capital chief economist Shane Oliver said this now puts a December interest rate cut into play, and potentially the RBA (Reserve Bank) might look to quantitative easing to fill in the cracks.

Today, Friday, the AUD is at .6784. Interestingly John Winter a leading Insolvency Practitioner said there had been a big lift in the number of companies across Australia going into liquidation this year, and saw that accelerating into next year adding to the RBA woes.

Offshore sentiment soured on trade uncertainty over the timing of the first phase of a US trade deal, while Data that showed China’s industrial production for October falling more than expected and Japan’s economic growth dropped back to a one year low. On the flip side the U.S. S&P 500 Index hit a new record high overnight on better domestic data.

Technically the AUD’s break of .6800 support suggests that the corrective rally may have run out of puff. The .6665 support held on the downside. However the AUD remains within a long term downtrend and the recent rally failed to break out. We remain of the view that the AUD will trade lower over the longer term.

Southern Aurora Wool Forward Market Report – 14th November 2019
By Mike Avery – Predictably Unpredictable.

The erratic nature of the spot auction was again at the forefront with a short-lived rally Wednesday losing steam almost immediately giving up half the gains Thursday.

Bidding in the forwards began the week ahead of cash into the first quarter of 2020 but failed to excite the sellers with sentiment and rumour suggesting a solid rally. The rally delivered better forward bidding levels with 19.0 trading to 1810 for January and 21.0 to 1760 for February and March. Considering the 21.0 Index closed the week at 1750 there are few better examples of valuing certainty of return over the fear of lost opportunity than this week. A hedge return of 1760 clean is equivalent of $2200 per bale (around 1200 greasy/kilo).

Volatility remains the bug bear of everyone along the pipeline. Exporters margins are dwarfed by the magnitude of the daily movements leading to conservative just in time approach if they are unable to effectively cover their forward risk. This has the affect of reducing efficiency in the pipeline disrupting a smooth flow of product ultimately constricting demand.

Where to from here? Probably more of the same on the forwards. The curve remaining flat into the first quarter discounted beyond. We expect buyers to remain keen to cover forward to keep turnover going but exposure at a minimum. Lack of volume in the forwards remains a concern and an impediment to getting better price signals outside of the truncated forward window.