According to a report by “Australian Finance Online” on August 5, Australian wool companies are truly feeling the pain caused by China’s domestic credit crunch. Industry insiders have mixed feelings about this major customer who purchases more than 70% of Australia’s wool products, and it has become more urgent to explore and think about the development direction of the local wool industry.
According to reports, Techwool is one of the largest traders and exporters of greasy wool and skim wool in Australia. Its trade manager Josh Lamb recently pointed out when attending a forum in Gunning, a small town in New South Wales, that China is proving to be the best partner for the current wool industry, but it also warns that most of Australia’s wool production is exported to China every year, and relying too much on a single market is not conducive to the development of the industry.
The theme of this forum is “Insight into Sheep and Beef Markets and Production Systems.” When explaining how to ensure the long-term profitability of the wool industry, Lamb listed three main issues: a lack of demand for high-quality fine wool, a lack of new entrants and the credit crunch in China. Two of the problems may not be solved – the lack of market demand for fine wool and attracting new players to enter.
Lamb said that the composition of demand for Chinese wool products has a greater impact on Australian wool production. China’s demand for wool is very important to Australian wool producers and exporters, but Chinese importers usually buy 21 micron fine wool and rarely choose to buy 18.5 micron fine wool with a better texture. This has partly contributed to the decline of the fine wool market. In other countries and regions such as India and Europe, the local fine wool processing industry is booming, but the demand in these countries and regions is small and cannot satisfy the excess production capacity of the Australian wool industry.
According to reports, 25 years ago, the wool industry was controlled by Japanese and European processing and trading companies, but now most of these companies have ceased to exist. As of the end of June this year, 72% of Australia’s total wool production had been exported to China. But China’s slowing economy is also putting downward pressure on wool buyers and processors. Lamb said that due to the impact of low returns, many corporate wool buyers and traders have withdrawn from the market. According to FarmWeekly, Lamb was quoted as saying, “Currently only 1/4 of the top 20 largest companies in the wool industry are legal entities.” Only family traders still tend to stick to the wool industry. Lamb explained that if corporate traders were to invest A$200 million or A$300 million in wool trading, then these companies would need to earn more than 1 per cent (the wool industry’s average return over the past five or six years). “This is unsustainable, not only unsustainable in the industry but unsustainable from a business perspective.”
Lamb admits that the current oversupply of fine wool on the market is due to dry seasonal conditions rather than the traditional form of low micron wool. So the only way to address the current weak demand is to reduce and absorb the amount of this drought-generated fine wool on the market as quickly as possible, but this will take time. Lamb said that he hopes that China’s imports will only account for 50% of Australia’s total wool production in ten years, because this means that the other 50% of wool will be exported to other countries to avoid over-reliance on the Chinese market – “This This is the reality we must face.”
The Australian Bureau of Agricultural Resources Economics and Technology (ABARES) predicts that China’s clothing retail sales growth will slow down, and the garment industry in major developed economies will continue to shift to the production of synthetic fiber clothing, which is expected to restrict the market demand for fine wool. Despite rising prices, Australia’s annual wool production will shrink further over the next year.
