By Eamon Timms
The COVID-19 virus has had a significant impact on the wool pipeline, as the market continues to show more signs of the challenges inherent in this once-in-a-100-year event.
As we know, China had the virus first and went hard to lockdown to keep it confined to Wuhan – as much as possible.
The timing coincided with Chinese New Year, which is often a time when wool purchasing from China is subdued.
Given the circumstances, there was concern and the wool market softened.
But its desire to keep the world’s second largest economy going did see China resume purchasing after several weeks – much to the relief of the trade.
Unfortunately, the rest of the world experienced the pandemic as China was coming out and this was when things began to look more problematic for the industry.
Retail shutdowns across the globe sent reverberations through the supply chains, as people stayed at home and apparel retail crumbled.
As a result, we saw a host of well known apparel brands severely impaired and significant names bankrupted – such as Brooks Brothers, J Crew, J.C. Penney and Men’s Wearhouse – and most of the rest of the ‘bricks and mortar’ retailers reeling.
The increase in online sales, including apparel from e-commerce sites and traditional ‘bricks and mortar’ brands, has been a real positive to come out of the crisis. But the volume moved cannot replace the drops in physical shopping.
As much as society will move to more online transactions, there will always be a proportion of sales in the traditional methods – particularly when ‘normal’ living returns – because people are social beings and many enjoy shopping, and doing this with friends.
Behind the scenes, the impact has been felt at every level of trading.
Exporters who take ownership from woolgrowers after sale have seen demand pared-back for new purchasing during the past five months.
But the most financially devastating issue has been a significant amount of wool users who have cancelled contracts that were signed pre-COVID-19, or tried to renegotiate the contract price down – or attempted to delay payment and shipment of contracted wool.
A very important point to note is that the majority of users in China are paying on time and meeting their contractual obligations.
The Australian wool industry had already experienced a bleak start to the financial year – with the wool price ‘flash crash’ in August – so to compound that with the COVID-19 crisis has made for a very challenging 12 months.
The wool exporters here effectively act as a bank, as they pay for wool 10 days after sale. So, such situations from wool users creates real headaches at a local level.
Topmakers have had the same experiences with delays, cancellations and re-negotiations and this issue also applies to yarn spinners, fabric knitters and cloth weavers.
Weaving seems to be the hardest hit of all, as suits and formal wear becomes irrelevant with so many offices pushing staff to work from home.
The impact of all of this is a build-up of wool stocks at every stage of the pipeline and, inevitably, these stocks will need to be moved – and at much lower prices than were paid for them.
Such issues in the supply chain now – and the level of stock build-up – are indicators that this COVID-19 issue will take an extended period to work out.
There are certainly retailers in the US and Europe that have decided garments they had made to sell now will be put into storage until the next northern winter.
We anticipate there will be better prices available on Merino wool in time. But a recovery to much higher levels is not expected to happen in the short-term.
Our discussions with wool companies in China that usually get forecasts about volume requirements from US and European brands have indicated that many of these users are not even able to give as much as a rough estimate, as they grapple with their future expectations of sales.
There are multiple drivers for Merino wool demand, considering the myriad of fabrics and uses – and the quality and versatility – inherent with this wonderful fibre.
Notably, a consistent message is coming through that sustainability and ethical production are going to be sought after even more than before the pandemic.
Additionally, there are brands that had moved away from using wool when prices peaked in previous years but are now starting to talk about their fabric costings with wool in their ranges.
The wool industry is more reliant than ever on Chinese consumers, who have been responsible for taking half of the 75 per cent of wool exported to China.
The current situation has exports to China running at well over 90 per cent and recent textile shows in China have provided some slightly better signals for the domestic market, which had slowed in recent months.
In consideration of trade tensions, we anticipate that – although there is a risk to other commodities – the dominant position of Australia growing 80 per cent of the world’s Merino wool should help us, as there would be little opportunity for Chinese Mills to produce the quality and volume of fabrics and garments they currently do.
Crossbred wool is not expected to have the same upside as Merino fibre due to less end uses and because Australia is competing with so many other countries producing crossbred wool – and at lower prices.
Crossbred wool will eventually improve, but it is important to recall the massive push factor of crossbreds hitting record highs two seasons ago – and this was for the fake fur fashion fad in China.
Since then, those fabric makers have trialled using synthetics instead of crossbred wool, so this will impact on volumes required one day – as part of that market will be substituted – when that style of coat in China becomes the ‘must have’ item again.
There is a large holding of crossbred wool by growers globally, so production far outweighs demand.
Importantly, the segment of the crossbred market finer than 28-micron has better prospects, as this is more versatile and Australia faces less competition on the supply side of this equation.
Confidence is such a massive factor in markets, and the announcement of a COVID-19 vaccine will be the confidence booster needed for economies to really turn a serious corner – and for our wool market, like many others, to get a lift in confidence.
Editorial inclusion featured in the Stock & Land ‘Wool Pipeline Clogged.’