Wool prices expected to continue strong

Press, 17 March 1987, Page 22

Wool prices expected to continue strong

PA Wellington Continuing strong wool prices at auction are proving to be expensive for those overseas customers who left their purchases until late in the season in the hope that the market would fall.

In its wool market preview, the Council of Wool Exporters predicts that prices are likely to remain firm at auction until the end of the season. While exporters still expect an end-of-season surge of second-shear wools to come forward in May or June, it is now generally accepted that wool clip for the year will be down somewhat on the previous season.

“The sudden and unexpected cut in auction catalogues in February and March caught many exporters and their customers on the hop,” said the president of the council, Mr Xavier Droulers.

“With continuing strong forward demand from customers in Eastern Europe and China, many customers elsewhere in the world are being forced to buy at present rates in order to be assured of supply. Other customers who have a choice of fibres are taking their business elsewhere. “The last few months have proved to be an extremely testing time for exporters — especially those who sold forward in anticipation that auction offerings would be similar to those originally rostered.

“The high interest rates and the firming of the auction market, despite a firming of the Kiwi against the main trading currencies, means that many exporters are now absorbing losses on con-'

tracts sold several months ago.”

The extent of these losses will vary with the risk management policies in place in each company. Mr Robert Pratt of E. Lichtenstein and Company, Auckland, said there was no way a company could set up a-risk management system which could eliminate all the unfavourable factors which had developed in the last few months. Nevertheless, he said his company’s procedures had proved to be fairly effective under very difficult circumstances. “For exporters which did not cover their currency or carry any physical stock, the loss will have been a double one — involving both a currency loss and a loss on the purchase of the wool at auction,” he said.

“That is why exporters strongly resent any interference in the mechan-

isms of the auction system. It is part of our business to carry the risk on a wool contract from the moment it is signed until final payment for the wool, several months later.

“Since we carry the exchange risk and the risk of changes in the physical auction market, it is vital for our financial viability that we should be able to recoup on the currency swings that we lose on the roundabouts.”

During January and February many exporters were squeezed by a change in the Wool Board’s intervention pricing policy, said Mr Droulers. After maintaining a constant intervention level in terms of a basket of trading currencies, the board decided to include a minimum Kiwi dollar price as a block to any fall in its intervention price.

“When applied in the face of a strengthening

Kiwi dollar, this meant that wool prices did not fall at auction as would normally be the case under these circumstances,” Mr Pratt said.

“The board took wool into stock which it is now releasing on to the market at a profit, thanks to the unexpectedly large drop in the clip. “At this stage the wool auction price is being set by exporters covering forward contracts to the Soviet Union and China which were written some months ago. They are also buying limited quantities for immediate shipment to customers elsewhere, principally in Western Europe and Asia,” said Mr Pratt.

“With a strong underpinning of forward sales, it is expected demand at auction will be firm for the next month and will very likely remain that way until the end of the season.”