Factors Behind Recession in Wool

Press, Volume CVI, Issue 31316, 11 March 1967, Page 10

Factors Behind Recession in Wool

In the accompanying article William Riley, a New Zealander with the Internationl Wool Secretariat in London, discusses some of the current market factors and influences in the world wool situation and their implications for New Zealand.

In the highly sensitive world wool market, just a little change in expectations or confidence can influence the commercial assessments of the people who buy wool. Just such a touch of confidence—perhaps even the feeling of spring—is needed to give New Zealand prices a lift.

But for more tangible prospects, New Zealand must look to signs of a thaw in Europe’s economic freeze which will swell the present trickle in consumer spending.

Realism rather than optimism suggests that it is too early for this sort of spring feeling in Britain, which takes one-quarter of New Zealand’s total wool exports. Consequently, it seems that New Zealand prices are likely to bump along at floor price levels for a while yet

Why should New Zealand wools have slid into this trough while a steady demand for finer wools has maintained a reasonable stability for Australian prices? Primarily, it is because New Zealand is the world’s major supplier of crossbred wools and large quantities of these go into carpets—the market for wool which is under greatest pressure in the freeze-afflicted countries which are its main customers.

Of course there are problems and pressures in other areas. The biggest single market for New Zealand carpet wools is the United States, where rival synthetic fibres are pushing wool hardest Crossbred wools are facing fierce competitioni too, in such end-uses as knit-

wear and handknitting yarns, blankets and furnishing fabrics.

For the moment, however, the big pinch is in carpets—and in Europe. “The United Kingdom, in particular, and Europe, in general, is going through the most widespread deflationary period, as it affects wool, that I’ve seen in 20 years here,” says a New Zealander, Mr R. G. Lund, deputy managing director of the International Wool Secretariat. “As a result, consumer demand has fallen off sharply, and the wool textile industry is living from stocks,” he says.

“This situation has been felt more severely in New Zealand because the biggest proportion of its wool comes to Europe—2s per cent to Britain and 38 per cent to the six Common Market countries. In the United Kingdom, about 55 per cent of New Zealand imports go into carpets. “When money is tight, people generally postpone buying carpets, which involves heavy expenditure and hire purchase terms but they continue to buy clothing.” Which, to a point, answers the question why Australian prices are holding—-their fine Merino wools dominate the top end of the clothing trade. Another cogent reason is that, with Japan now buying onethird of its clip, Australia is

not so deeply involved in the freeze on this side of the world. Knowledgeable people connected with the wool trade here agree that the fundamental reasons for New Zealand’s present predicament are these: The economic squeeze in

Britain and most European countries that has put a clamp on spending and commercial expansion. High interest rates, credit restrictions and a wage freeze have severely curtailed business activity, brought unemployment and short-time work, and deflated consumer demand.

In the wool textiles trade, this reduced demand—and the high cost of holding stocks

and financing purchases—has resulted in business on a hand-to-mouth basis from the retailer right back through the manufacturing and processing industries. Orders are being kept to a minimum, and are being supplied as much as possible by running down stock.

Carpets, being a major domestic commitment, are among the first consumer economies in a credit squeeze —a decision dictated mainly by the restraint on hire purchase. (Britain’s hire purchase debt dropped £llB million in the second half of 1966.) Also contributing to the fall-off in demand for car-

pets, and also furnishing fabrics, has been the slowdown in house-building. A sharpening in competition from synthetic fibres is always an underlying factor in wool’s important carpet market. In the current squeeze, the big fibre companies have been feeling the pinch too. Because of overcapacity and over-production, synthetic fibres have been selling at cut-throat discounts well below their list prices—and well below comparable wool prices. Also impinging on New Zealand’s selling position is the availability of much cheaper crossbred wools from South America, and especially from Australia. New Zealand’s superior crossbreds have generally commanded a 10 per cent price margin on South American, but a new situation has arisen with comparable Australian types selling considerably below the New Zealand floor price. It needs to be underlined, however, that all this is not as foreboding as might appear from such a scrutiny of the debit side of the ledger. Wool is moving in the mills, in the factories, and over shop counters—even though raw wool purchases are lagging. Business is not at a standstill.

The woolgrower can do nothing about international economic conditions, but he can and is influencing the

longterm consumer demand for his product by Its forceful promotion through the International Wool Secretariat. At present, this demand is being suppressed by over-riding economic pressures.

But it should be noted that there is general confidence in the future for wool among textile industry leaders here and in Europe. They have experienced this sort of situation before.

What has not been seen before is such a confluence of so many powerful market forces bearing so heavily on coarser crossbred prices—with such sudden and serious effects for New Zealand in particular. Incidentally, the New Zealand woolgrower’s impressive production increases are not regarded as having created a position of over-supply materially contributing to depressed prices. Any contraction in New Zealand supplies would quickly be supplanted by other crossbred wools—or more probably by synthetics.

The critical short-tenn issue for New Zealand is: when and to what extent will prices take an upturn? Paradoxically, the most hopeful portent is in the big depletion of stocks—the very thing which has accentuated the pressure on prices. Retailers are carrying smaller stocks of carpets and have reduced their orders. Manufacturers have cut production and run down operating

stocks and their stores of carpet yams. Likewise, spinning and top-making firms are operating on reduced stocks and short orders. When demand begins to pick up, there will have to be a quick re-stocking throughout the chain, plus increased orders to meet increased production, and consequently an immediate upturn in the demand for raw wool at auction.

That is the theory anyway, but obviously a prerequisite is an easing of the economic thumbscrews. Just a minor economic revival could bring a helpful lift for New Zealand prices. There have been cautious hopes that the recent i per cent cut in Britain’s bank rate might presage a gentle start to a reflation of this country’s strengthening economy, but: Economic Affairs Minister, Mr Michael Stewart, has counselled: "No, not yet” So the big question remains —when?