Wool prices in the Australian wool market dropped alarmingly in the week ending 16th August. Clearly the negative sentiment in the wool market triggered by the Trump Administration’s announcement of 10% import duties on the remaining imports from China two weeks ago and the subsequent devaluation of the Chinese Renminbi continued. The decline in the EMI since the peak exactly one year ago (including the sharp falls in the past fortnight) follows the pattern we have seen for all five Supercycles over the past 30 years. That is, there is a strong rise in wool prices which lasts longer than expected and which reaches a peak, before a price downturn, triggered by an outside event but with conditions in the wool textile industry that have reached a state ripe for a decline in wool prices. Prices then retrace a significant portion, but not all, of the price gains seen in the Supercycle.
Prices have fallen by around a third from the peak for each of the past three Supercycles. So far, prices for the current Supercycle have dropped by 28% in A$ terms and 33% in US% since the peak in August 2018. As well, for each of the past four Supercycles, the low point after the Supercycle was higher than the low point for the previous Supercycle. The current level of the EMI in both A$ and US$ is above the low point in the 2011-2012 Supercycle. History therefore brings us hope that we are nearing the end of the current price decline. However, there is considerable global geo-political and economic uncertainty, including the upheaval in Hong Kong, the news this week that Germany’s economy went backwards in the last quarter, the increasing tensions between Japan and South Korea, and rising anxiety about recession in some of the major economies. These have all come on top of the US-China tensions. These events as well as the current difficult conditions for wool textile mills, notably in China, are likely to prevent a reversal of the downturn in the near term despite the forecast of lower wool production in Australia in 2019/20.
Further details including a chart the downside of the past five Supercycles are provided in the full edition of the NCWSBA Weekly Newsletter. Available to NCWSBA members.