Have Australian wool exports felt the pinch of the global financial crisis (GFC)? Raghu Rajakumar investigates.
From ship to shore
Australia is the world’s largest producer of wool, accounting for 25 per cent of world production. Exports are approximately 98 per cent of total production, with more than 60 per cent of all exports to China.
Participants in the Australian wool sector are concerned Chinese buyers account for such a large percentage of exports, while other markets such as Germany and Taiwan are eroding. This could lead to a strong dependence on China and in turn a situation where one nation dictates pricing.
This comes at a challenging period for the industry. Export earnings have been declining over the past five years due to increasing competition from alternative fibres, an appreciating Australian dollar and a decrease in wool production (more on that later).
The world demand for Australian wool was particularly hurt by Australia’s pre-GFC dollar which made exports relatively more expensive for foreign buyers. As such, export volumes decreased by 11 per cent over 2007/08, even though world production levels declined.
More recently, global consumers have been deterred from buying more expensive woollen clothes due to slowing economic activity worldwide. According to the Australian Bureau of Agricultural and Resource Economics (ABARE), greasy wool exports were eight per cent lower and export values 18 per cent lower between July 2008 and April 2009, when compared to the same period last season.
The largest decline occurred in November and December following the global financial crisis, when export volumes fell nearly 25 per cent compared with a year earlier. This decline reflected expectations about future consumer spending at the time.
A question of ethics
Wool producers in Australia have been criticised by animal rights groups for mulesing practices, which are considered painful to sheep but believed to produce the best quality wool.
Earlier this year, a manufacturer and distributor of the Pierre Cardin brand, Kukdong Corporation, joined a host of global companies in opposing the practice. Others include Nike, Hugo Boss, H&M, Gap, Liz Claiborne, Abercrombie & Fitch, Marks & Spencer and Timberland.
This has hurt the popularity of Australian wool and partially reduced the demand for exports as retailers all over the world support pain-free mulesing. The industry aims to phase it out by the end of 2010 with plastic clips believed to produce similar quality wool to mulesing with less pain to the animal.
The chop
Wool comprises the largest proportion of the sheep farming industry’s product segmentation, accounting for an estimated 32.7 per cent of industry revenue. The number of lambs and sheep raised for wool is closely linked to wool returns relative to returns for selling lambs for slaughter. High wool prices encourage farmers to retain lambs for longer for additional wool shearing.
However, wool prices are expected to continue to fall over the year as the global economy deteriorates. Recessionary conditions in the US and Europe are expected to impact orders for semi-durables such as yarn and apparel, resulting in depressed demand for Australian raw wool.
On the other hand, earnings from lamb meat exports are steadily increasing and, as a result, we are seeing more farmers moving away from wool production and into the raw meat category. Figures from ABARE suggest the national sheep flock will have been reduced to 77 million head in 2008/09 – this is after falling seven per cent to 80 million the previous year.
IBISWorld estimates total wool production will decrease by 9.1 per cent over 2008/09 to 353.61 kilotonnes. Lower production is expected in all states in 2008/09, with the largest falls in Tasmania, South Australia and Victoria.
IBISWorld expects the trend away from wool production in recent years is likely to continue over the year, as lamb and other agricultural prices hold up better than wool. The price of wool is also expected to continue falling over 2009/10 as recessionary conditions constrain demand in downstream apparel and textile markets, both at home and abroad.
The silver lining
As stronger demand conditions return to key export markets from 2011 onwards, Australia can expect to see a recovery in wool prices in turn. The reduction in the national flock witnessed in recent years means prices should rebound quickly, benefited by a relatively low Australian dollar.
The practice of mulesing will continue to be a contentious issue over the outlook. If the wool industry meets its commitment to ban the practice by 2010, the forecast looks more optimistic. IBISWorld estimates the EMI price of wool will increase at an average annualised rate of 3.8 per cent over the five-year period to 2013/14.