These are challenging times for the global wool industry

These are challenging times for the global wool industry

This has not been a good year for the global wool industry. The world’s top two wool-producing countries – Australia and South Africa — are experiencing different, yet growth-constraining, challenges.

In South Africa, the challenge is trade-related. Earlier this year, China, which accounts for roughly 71% of South Africa’s wool exports, temporarily stopped buying the country’s wool. This was because of a foot-and-mouth disease outbreak in Limpopo. The impact of this ban was immediately felt across the industry and sheep-farming communities of South Africa.

The local authorities responded to the cries and started engaging with their Chinese counterparts in efforts to ensure that wool trade resumes between the two countries. But there hasn’t been a complete success thus far (I recently spoke to a senior government official about this).

Making things worse is that aside from the Chinese wool market, wool-producing countries do not have many options. China is truly the “only game in town” when it comes to the wool market – demanding an average of 62% of globally traded wool in value terms over the past five years.

Other notable global wool importers are India, Italy, the Czech Republic, South Korea, Egypt, Thailand, Bulgaria, Japan, Germany, Turkey, Taiwan, Lithuania, and Belgium. These countries collectively accounted for 27% of global wool imports in 2018. South Africa already has a presence in these countries, albeit currently only a small share of their import volumes.

So, over the coming weeks, we will keep our eyes on the South African and Chinese governments talks with a hope that wool trade between the two countries will resume soon.

In Australia, farmers are struggling with drought. The Financial Times (FT) ran an article this morning describing the devastation the drought has thus far had on the wool sector. Farmers struggle to feed their sheep, and also the quality of wool is depleting. The International Wool Textile Organization currently forecasts a 12% y/y reduction in Australia’s 2019 wool production.

The FT notes that “the latest available industry projections, which are compiled using government data and were published in June, show the national flock was expected to have fallen to 65.3 million animals at the end of that month, a decline of 3.7% in June last year. It follows a 6% decline in 2017-2018 when the drought took hold, forcing farmers to begin buying feed to keep their flocks alive when grass in the paddocks became exhausted.”

One would have expected the aforementioned challenges to lead to an uptick in global wool prices. But that is not the case. The Chinese demand for wool has declined somewhat over the past few months because of the China-US trade war which is starting to weigh on the global economy. And thus, keeping global wool prices at softer levels, in spite of what is happening in South Africa and Australia. Also, worth noting is that over the past few seasons the wool market had a good run, so there is also a bit of price-correction baked in the current story.

These are indeed challenging times for the global wool industry.

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