The Merino Wool Market:

What Has Gone Right and Can it

Continue?

Chris Wilcox

Executive Director, NCWSBA

and

Chairman, Market Intelligence Committee of IWTO

World Merino Conference

Montevideo, Uruguay

April 2018

What Has Gone Right for

Merino Wool?

40

60

80

100

120

140

160

180

200

220

240

260

280

300Aus 16.5 micron

Aus 18 micron

Sth Af 21 micron

Aus 23 micron

Index

Jan 2010 =100 Local Currency

Merino Wool Prices on a High:Australia and South Africa

Source: AWEX, NZ Wool Services, Capewools, BWMB

Data to 29th March 2018

40

60

80

100

120

140

160

180

200

220

240Aus 16.5 micron

Aus 18 micron

Sth Af 21 micron

Aus 23 micron

Index

Jan 2010 =100 US$

Merino Wool Price Supercycles

DatePeak Price*

Price change - start

to peak*Weeks -

start to

peak

Comments

UScents Acents UScents Acents

February 1986

to May 19881203 1582

+743

(+162%)

+925

(+140%)111

Strong co-ordinated economic

growth, Soviet Union buying, China

begins, positive fashion styles

April 1993 to

March 1995707 949

+379

(+116%)

+496

(+107%)97

World economic recovery, post

Reserve Price Scheme collapse

“bounce”, China emerges

November 2001

to January 2003709 1211

+350

(+97%)

+501

(+71%)59

Last bale of the Australian wool

stockpile sold – kicks off price rise

May 2010 to

June 20111512 1434

+789

(+109%)

+564

(+65%)57

Global economic recovery after

GFC and cotton prices to 100+

year highs

April 2016 to

March 20181439 1830

+540

(+60%)

+586

(+48%)99+

Solid economic growth in US & EU,

general commodity price rise.

Constrained Merino wool

production.

* Based on the Australian Eastern Market Indicator, 2017/18 basis+ Peaked at 2nd March 2018

50

60

70

80

90

100

110

120

130

140

150

160

170

180

190

200

All Items Food

Metals Oil

Wool (Aus EMI)

Index: Jan 2016=100

General Price Rise for Commodities(US$ basis)

Source: The Economist metals and commodity prices US$ index; AWEX EMI in US$. Cotton Outlook for cotton and Mackenzie Wood PCI Fibres for polyester staple and acrylic

Data to 29th March 2018

50

60

70

80

90

100

110

120

130

140

150

160

170

180

190

200

Cotton

Polyester

Acrylic

NZ Broad wool

Aus 18 micron

Index: Jan 2016=100

Drivers of Demand for Merino Wool

• Economic conditions, consumer incomes and

consumer confidence

• Retail sales of clothing

• Consumer tastes and preferences– Business vs casual or a blend?

– Fast fashion

– Sustainability

– Luxury

• Prices for competing fibres

• Stocking and destocking of the wool textile pipeline

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Strong global

economy, USSR

buying, China

Wool Wars

1203

US cents/kg

Source: AWEX – 2017/18 basis

Data to 29th March 2018

World Economic Events and Merino Wool PricesAustralian Eastern Market Indicator

321 311

921

709

World economic

recovery, ‘dead-

cat’ bounce post-

RPS

706

World economic

recovery, cotton prices to

records, very strong A$

1508

trend

Asian Financial

Crisis

Global

Financial

Crisis

461

Stockpile

sold, supply

squeeze

1363

Euro debt

crisis

918

Double-faced

woollen

fabric mania

1074World

economic

growth

grows

solidly, low

Merino

supply

USSR implodes,

Tiananmen

Square. RPS

collapses

Broad-Based Economic Upturn in 2017 and 2018

-2%

0%

2%

4%

6%

8%

10%

12%

World China Euro-zone

USA Japan UnitedKingdom

Average 2000-2008

2016

2017e

2018f

2019f

% change yr-on-yr

Source: World Bank, Global Economic Prospects, January 2018

➢ Improved economic growth

forecasts in all key countries:― China, Germany, Japan,

France, Italy, US, UK and Korea

➢ Driven by higher investment,

trade, helpful economic and

financial policies and improved

confidence

➢ Consumer confidence at near 20

year highs in US and EU

➢ Clothing retail sales better in

most major wool consuming

countries

China Drives the Increased Demand for WoolCalendar Year

0 50 100 150 200 250 300 350 400 450

China

India

Italy

Germany

Czech Republic

Other Europe

Other

mkg greasy equiv.

2017 2016 2015

2014 2013

+2%

-5%

+5%

-5%

-3%

+3%

-0.4%

Note: From the five major exporting countries (Australia, New Zealand, Argentina,

Uruguay and South Africa

Source: Australian Bureau of Statistics, FLA, SUL, Capewools, Beef + Lamb NZ

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000 60,000

Apparel Wool Consumption Rises as Incomes Lift

Income (US$/head)

ItalyUK

Turkey

Japan

USA

Germany

S Korea

India China

Spain

Australia

Russia

France

Wo

ol co

nsu

mp

tio

n (

cle

an

kg

/pe

r h

ea

d)

Source: International Monetary Fund and Woolmark

Apparel wool consumption is apparel NDA at retail average 2015-2017 as estimated by Poimena

Analysis. Income is US$ GDP per head in 2017 on a purchasing power parity basis.

Trend Line

Knitwear35%

Men's suits11%

Men's overcoats6%

Men's jackets11%

Men's trousers10%

Women's overcoats15%

Other women's wear12%

World Trade in Wool Clothing in 2016(% share)

Source: Foreign Trade Statistics, International Trade Centre,

Poimena Analysis & Delta Consultants

Longer Term Outlook Positive

• Growing demand for fine Merino wool

• Long-term prospects for wool depend on

global economic conditions and income

growth, not relative production with other

fibres

• Demand for business-wear for men will

continue to be a mainstay for wool

• Knitwear a growth area, particularly with

increased demand for active leisurewear and

casual garments

• Coats the best performers in womenswear for

wool

• Trade in other women’s wool clothing

recovering a little

Product Segment Prospects:

Growth Opportunities For Merino Wool

Growth Mainstay Decline

Total and Merino Wool Production Stable At

Lows

0

100

200

300

400

500

600

700

800

mkg clean

Apparel wool

Interior textiles wool

Merino wool

Source: IWTO, Country statistics, Poimena Analysis

Updated March 2018

2016 total production

1,130.8 mkg clean

2017 total production

1,136.9 mkg clean

Near 70 year lows

2018 total production

1,145.7 mkg clean

Stocks:Use ratio

~8%

0%

1%

2%

3%

4%

5%

6%

7%

0

20

40

60

80

mkg clean % of Total Clip

mkg clean % of totalWORLD

But, Superfine Wool Production Remains High

0%

5%

10%

15%

20%

25%

30%

0

20

40

60

80

mkg clean % of Total Clip

% of totalAUSTRALIAmkg clean

Source: Poimena Analysis, AWTA, NZWTA, Cape Wools, FLA, Delta, American Sheep

Industries, China Wool Textile Association.

Updated March 2018

Australia Dominates Global Merino Wool Productionshare - 2017

Source: AWTA, AWEX, NZWTA, CapeWools, FLA, ASI, Delta Consultants,

estimates by Poimena Analysis

Australia

South Africa

Argentina

Uruguay

New Zealand

USA

China

Russia

Other CIS

Spain

France

Germany

Rest of world

Can It Continue for Merino

Wool – What Are The Risks?

Risks to Global Economic Growth

• Rising interest rates

• Global financial imbalances

• Credit risks in China

• Potential for a trade war – Trump Administration’s

unilateral action

Wool Garment Exports from China Falling Back(12 month moving aggregate)

Source: China Customs and China Wool Textile Association

Data to January 2018

30

40

50

60

70

80

90

100

110

dic-08 dic-09 dic-10 dic-11 dic-12 dic-13 dic-14 dic-15 dic-16 dic-17

mill. pieces

Sweaters Woven wear

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

jul-95 jul-97 jul-99 jul-01 jul-03 jul-05 jul-07 jul-09 jul-11 jul-13 jul-15 jul-17

Wool:cotton

Wool:synthetic fibres

Price Ratio

Source: AWEX, Cotton Outlook, PCI Fibres, CIRFS, Poimena Analysis

Compared with 21 micron wool. Data to March 2018

Merino Wool’s Price Ratios With Other Fibres

Rises to New Level

Shift to Crossbred Wool in Australia

Crossbred wool share of

total wool production has

increased

• 11% in 1991/92

• 12% in 2002/03

• 13.5% in 2008/09

• 17.2% in 2017/18

50%

60%

70%

80%

90%

100%

% breeding ewes Merino Ewes of Total

Has the Decline in Merino

Breeding Ewes in Australia

Come to an End?

Shift to Crossbred Wool in Australia

“Sooner or later coarse crossbred values will sink to a

low level…On the other hand, the world’s supply of

merino wool is decreasing steadily… Is it not time to

pause and consider well whether the outlook in regard

to wool production is sound? If we are to preserve our

wool supremacy in the future we must preserve our

merino flocks.”

The Sydney Mail, 24th July 1918

Constraints on Merino Wool Production

• Available land in a suitable climate

• Competing land uses– Cropping

– Forestry

– Dairy

– Beef

• Lamb and sheepmeat demand and prices

• Relative profitability

• Technology and productivity gains

Summary of Key Drivers

1. Higher economic growth leading to upturn in commodity prices (including

Merino wool)

2. High consumer confidence and higher clothing retail sales growth

3. Increased raw wool demand, notably from China

4. Increased use of Merino wool in active and leisurewear?

5. Low production of Merino wool

6. Virtually no stocks left

BUT

1. Risks to global economy

2. High price relativity for Merino wool against competing fibres

3. Lower trade in wool clothing, including men’s suits

4. Increased Merino wool production constrained

Merino Wool Price Supercycles – the Downside

Date

Price change –

peak to low*Low Price* Weeks

– peak

to low

Comments

UScents Acents UScents Acents

May 1988 to

March 1991

-666

(-55%)

-1045

(-66%)418 537 118

Collapse of the Reserve Price

Scheme, Soviet Union falls apart,

Tiananmen Square

March 1995 to

May 1996

-232

(-33%)

-343

(-36%)475 606 51

Market adjusts to massive

stockpile in Australia after ‘dead-

cat’ bounce post-collapse of

Reserve Price Scheme

January 2003 to

December 2005

-229

(-32%)

-562

(-46%)480 649 136

Economic slowdown, excess

stocks in wool textile industry,

SARS outbreak in China triggers

price fall

June 2011 to

September 2012

-549

(-36%)

-501

(-35%)963 933 57

Global cotton prices drop as China

builds up massive cotton stockpile,

causing drop in all fibre prices.

Excess stocks in wool textile

industry

* Based on the Australian Eastern Market Indicator, 2017/18 basis

Thank You!