After an all-time high around two years ago the Australian wool price has faced a tough run, with the benchmark Eastern Market Indicator (EMI) losing around 46% of its value on a monthly average basis since September 2018. And while there was a market correction in 2019, 2020 has brought with it the full weight of the coronavirus pandemic, depressing prices further.

According to National Australia Bank (NAB) senior economist Phin Ziebell, Australia is almost completely dependent on China as an export market. Up to 80% of production by volume is shipped to China and has been for the last decade.

Chinese buying activity had been slowing before the pandemic hit and, while Chinese industrial production had largely recovered, Chinese consumers remained cautious and forthcoming export demand was uncertain, he said.

Clothing sales across a number of major economies had crashed spectacularly in the first wave of the pandemic, but have recovered somewhat faster than many expected. However, with the hit to incomes across the world, he said it’s likely discretionary purchasing will remain limited. A change to buying behaviours could also be on the cards.

“We must also consider the possibility of a structural move away from traditional wool-heavy office attire if working from home becomes entrenched.”

Ziebell said market factors meant wool was unlikely to see limited upside for the remainder of 2020. “While a poor price will likely lead to domestic stockpiling, it’s hard to see a pick-up in demand fundamentals, and a higher AUD will be a drag. NAB sees the EMI around $10/kg this year and $12 next year.”

Australian wool production has fallen 63% since 1989-90. Consumer moves away from wool and unsustainable support culminated in the collapse of the wool reserve price scheme in 1991, leading to a structurally lower wool clip in Australia. The stockpile took a decade to sell down and by the mid-2000s China was the sole remaining large buyer of Australian wool.

There has also been a move away from mixed farming in the sheep-wheat belt towards cropping-only enterprises, with fencing, sheds and management expertise now gone. Many remaining sheep producers have transitioned to crossbreeds for fat lamb production and, with lamb prices strong, the incentive to focus on meat rather than wool is considerable.

While wool production in other major exporting countries has also fallen, Chinese domestic production has continued to increase. Australia produced nearly 30% of the world’s wool at the beginning of the 21st century but now produces around 20% – roughly comparable to Chinese domestic production.