Commodities and Derivatives: The wool market grows some bulls

WOOL will be big this autumn and winter, so the catwalks in Paris tell us. Last week, all the big designers were displaying the fibre.

Sales of Italian mens' suits made of the very finest Australian wool are already rising, helped by the weak lira, while medium-quality knitwear continues to sell well in Marks & Spencer and other big multiple retailers.

'Shell suits and sweatshirts are going out and knitwear - especially the chunky look - is coming in,' says Liz Ambler of the British Wool Marketing Board.

Wool is benefiting from the growing fashion for natural materials, which last year helped to keep its global demand unchanged in an overall shrinking fibre market.

No one, of course, is happier about this than the wool growers, who just a year ago had to cope with the most depressed prices in real terms for decades.

The double-dip recession in the global textile industry and several years of overproduction were responsible for the bad times.

But world wool output has since contracted sharply because disillusioned Australian farmers, in particular, have been switching to other commodities.

At the same time, textile manufacturing demand has picked up, especially for top-quality Australian and South African Merino wool, which is used for clothing.

Its price at auction has jumped to the highest level for two years, but the British market has done even better, with the average realised at recent Bradford sales topping 95p a kilo for the first time since 1990.

British supplies are much tighter than they were, now that the BWMB has cleared its big stockpile, while new sales deals struck with the carpet industry - which takes about 60 per cent of the national clip - have lifted demand.

Commodity and textile industry analysts are convinced that the wool market has at last turned the corner, helped by the prospect of a world production shortfall this season.

The Brussels-based International Wool Textile Organization forecasts global 1993-94 world raw wool production down 5 per cent at 1.576 million tonnes, putting it below expected demand and implying a fall in stocks for the third season running from the record high accumulated by the end of 1991-92.

Yet a note of caution needs to be sounded. 'There is the dichotomy of a still very price-sensitive retail textile market and the pick-up in raw material prices,' says Ian Hilton, chief economist at the Ilkley- based International Wool Secretariat, which promotes the fibre.

'Prices of wool, like those of other commodities, are rising faster than retail sales generally.'

With textile activity overall restrained by the poor trading conditions in Japan and Germany, and intense competition squeezing retail profits, there is certainly no industry boom under way yet - only expectations of one.

Manufacturers are already rebuilding stocks of raw wool, yarn, tops and fabrics - which had been run down sharply in 1993 - in anticipation of much better sales from late summer. Yet they had also stocked up in 1992 in readiness for an upturn the following year only to get their fingers burned.

Moreover, although picking up well in the UK and North America, worldwide demand for carpet wool - the type produced mostly by New Zealand - is not rising as fast as that for apparel wool.

What is needed, according to analysts, is generally greater consumer confidence in Continental Europe and in Japan.

On the negative side, too, is the fact that, although falling, raw wool inventories remain high historically and the Australian government - which holds about 75 per cent of the total - will be starting the gradual liquidation of the national stockpile from June.

Because releases have to be made at a prefixed monthly rate, no matter what prices are doing, discounts may have to be offered to meet targets.

China's future buying intentions are another uncertainty. Its emergence as a big importer of Australian wool soon after credit and hard currency shortages had forced the Russians to stop their heavy buying certainly helped to contain the 1992-93 price fall.

But China, in the past, has moved out of the wool market just as suddenly as it moved in, with grievous consequences for prices.

Wool, it is feared, could be a casualty of the falling yuan and a downturn in Chinese textile activity as Beijing tries to cool the economy.

Still there are many more bulls than bears in the wool market, which - along with rubber, another commodity whose price has picked up from the 1993 lows - traditionally sets the pace for the sector generally.

This is because the two (and cotton, whose price is also surging) straddle the divide between metals and softs: agricultural commodities whose fortunes rely just as much on industrial activity as the weather.

Big jumps in wool and rubber prices heralded the commodity booms at the start of the 1950s and the early 1970s.

Many reckon that history may be about to repeat itself.

(Photograph omitted)