Andrew Pape

MD of Modiano SA

After reaping the benefits of the excellent international wool prices achieved in 2018 and early 2019, the South African wool industry has since encountered major challenges during the past 18 months. Firstly, an FMD outbreak in the country resulted in the Chinese government banning the import of South African wool for over 6 months (February to August 2019). During this period the lack of Chinese competition in the SA market resulted in the prices of SA wools selling at a substantial discount to equivalent Australian wools. As a direct result of the shipping backlog caused by the FMD ban, the SA wool industry decided to postpone the opening sale of the 2019/20 auction selling season by 2 weeks (to 04 September 2019), so that the brokers could clear the unshipped backlog of 48,000 bales destined for China.

A few short months after resolving the FMD ban issue, we encountered an even bigger crisis, with the outbreak of COVID-19 in China and the subsequent ‘hard lockdowns’ that started being rolled out in the country from 23 January 2020. On 19 March 2020, the South African government followed a growing international lockdown trend and announced a very stringent countrywide lockdown that resulted in the cancellation of 2 wool auctions.

Thankfully, on 3 April 2020, the SA wool industry was granted essential services status and we were able to resume auctions and shipments. Due to the lack of international demand for greasy wool and wool tops at this time, the SA wool industry role players decided to reduce the amount of wool to be offered weekly and to rather extend the wool selling season into the offseason period. As a result, our last auction of the 2019/20 season was held on 08 July 2020 (5 weeks later than originally scheduled).

The latest available Cape Wools export figures for the 2019/20 season show that China has remained the main export destination for SA wool, with a market share of over 75%.

As with so many other industries, the wool market has not been spared the adverse economic impact of COVID-19, causing wool prices in South Africa to decrease by 30% in USD terms since the beginning of February 2020. During this period the Rand has, however, weakened by 13%, which has softened the economic blow to the SA wool producers. Globally, the apparel trade has unfortunately been one of the worst affected industries. The COVID-19 pandemic has had a devastating effect on the demand for greasy wool and wool tops, resulting in extremely difficult trading conditions. 

All processing mills are understandably uncertain as to what purchasing and production plan to follow in the coming months. The market uncertainty caused by the large decrease in wool prices has resulted in many processing mills in China now having to place larger deposits with window companies when they open L/C’s, which together with a lack of sales has put serious pressure on their cashflow. Unfortunately, many mills have a large portion of their working capital currently tied up in expensive tops stock which they are finding extremely difficult to sell in the current environment. Add in the overcapacity of processing mills in China, the ongoing US-Sino trade war, and a lack of domestic and export orders and it is understandable why the current mood is so pessimistic. 

The large amount of passed in and withdrawn lots from sales in Australia in recent months has also sparked concerns amongst tops producers about a potential oversupply situation in the coming months, once these reported 400,000 unsold bales return to the market. Since the new season resumed it appears that a combined weekly offering of around 35,000-40,000 bales between SA and Australia is all the market can currently handle.

Despite the Cape Wools market indicator being only 854 USC on 09 September 2020 (versus a high of 1669 USC on 08 June 2018), many role players don’t see any strong price recovery before the middle of 2021. Hopefully, the current attractive greasy wool prices will help boost demand for wool products in the short to medium term, as the reduced prices filter down into the retail sector. Also, once the COVID-19 pandemic is more under control, we should see a big increase in foot traffic to retail stores and a resultant increase in wool product purchases. 

History suggests that once the wool market reaches the low point of a downward price cycle, it generally takes up to a year to regain around 50% of the price fall. The uncertainty about how long the downward cycle will continue and exactly how low prices can potentially reach is certainly unnerving many in the industry. Whilst it may yet take some time before the wool market shows some sign of a decent recovery, it will certainly bounce back to more reasonable levels. We are all hoping that the recovery happens sooner rather than later. 

In South Africa, growing conditions the past year have been very good with the majority of the country having received good consistent rains over the past few months. The recent good rains have, however, resulted in an increase in seed and shive during the early part of the new season. The brokers say they expect production of South African wool (excluding Lesotho’s) for the 2020/21 season to approximately 46 million kgs. 

We also expect that approximately 35,000 bales of Lesotho wools will be offered for sale on the SA auction system during the new season. The Lesotho government has finally lifted the ban on the sale of the Lesotho wools on the SA auction system and agreed to sign off the required Lesotho vet certificates required for the export from SA to certain countries, including China. WEF August 2020, exports of Lesotho wools from SA to China have now resumed. 

Modiano SA would like to thank our clients for their valued support during the past year and we hope that the current market situation improves for them in the not too distant future. The cancellation of the Nanjing Wool Market conference this year was obviously very disappointing, as the conference is always extremely valuable in gauging the mood of the various stakeholders in the wool fraternity. The 2021 conference will be eagerly awaited. I wish all our friends in China and the rest of the world much improved trading conditions in the coming months.