World textile demand remains positive
Growth in global incomes and populations continues to underpin textile demand.
Increased purchases of cotton-based textiles and clothing are expected to be driven by an expansion in the number of middle-class consumers in emerging economies. Concerns about the environmental impact of synthetics is also encouraging cotton use in textiles.
Demand for raw wool is derived from consumer demand for high-value woollen textiles and apparel. Assumed income growth in major markets—such as China, the United States and the European Union—is expected to underpin global demand for fine wool. However, increased uncertainty about future economic growth stemming from trade tensions, especially between the United States and China, could weaken this outlook.
World cotton supply to fall and prices to rise
World cotton production is expected to fall in 2018–19 due to dry weather in Pakistan and the United States. Area planted to cotton and average lint yields are expected to fall. The forecast fall in production in these regions is expected to offset rises in Brazil and Turkey. World cotton consumption is expected to exceed production in 2018–19, leading to reductions in world stocks and the stocks-to-use ratio.
Australian cotton production is expected to fall in 2018–19. This is largely due to a decline in area planted as a result of significantly reduced water levels in irrigation dams and low levels of stored soil moisture.
Increased world prices and an assumed depreciation of the Australian dollar are expected to lead to a modest price increase on top of already high prices.
Wool production to fall and prices to remain high
Australian total wool production is forecast fall in 2018–19. This reflects an
expected decline in the number of sheep shorn and the average cut per head. The fine wool supply from other markets is expected to decline, primarily driven by unfavourable conditions in South Africa.
The Eastern Market Indicator wool price is expected to increase year-on-year in 2018–19. A reduction in buyer demand has resulted in a sharp price decline of 12% since August 2018. However, the expected fall in aggregate wool production is anticipated to support prices for the remainder of 2018–19.
Poor conditions increase superfine wool supply
Dry seasonal conditions in eastern Australia have pushed the average micron lower. This has resulted in an increased but lower-quality supply of superfine wool and has contributed to the decline of premiums and high pass-in rates. Increased offerings of lower-quality and finer micron wool are assumed to continue alongside poor seasonal conditions.
Change in AWTA testing volume, Australia, July to November 2018
Note: Percentage change relative to same period in 2017.
Source: Australian Wool Testing Authority
Opportunities and challenges
Uncertainty in global textile demand
Ongoing US–China trade tensions remain a risk factor to global economic activity and the outlook for textile markets. A significant proportion of Australian natural fibre is processed in China and exported to the United States as textiles and apparel.
The overall impact of the US–China trade dispute on world textile trade and derived demand for Australian natural fibres remains uncertain. Semi-processed products, such as yarn and fabrics, were included in the latest round of tariffs announced by the United States. No trade restrictions have been imposed on finished apparel. However, they could be included in future escalations of the dispute.
Chinese consumer confidence and garment sales have been in decline since the escalation of the trade tensions. This could signal weakening textile demand in China, especially for high-value woollen apparel. The dispute could lead to further declines in consumer confidence in China and globally.
Consumer confidence index, July 2014 to October 2018
Note: Normal (long-term average) = 100. Euro area: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovak Republic, Slovenia and Spain.
Source: Organisation for Economic Co-operation and Development
Substitute fibres remain competitive
The current high prices for cotton are expected to result in sustained competition from polyester and other synthetic fibres. Relatively low oil prices over the last few years have increased the price competitiveness of synthetic fibres against cotton.
Fine wool is less substitutable with synthetic fibres. However, high wool prices are an incentive for textile manufacturers to substitute lower-cost fibres. The effect on wool demand is difficult to predict, but high prices for wool pose a downside risk to the current forecast.
Price indices of substitute fibres, July 2014 to November 2018
Note: July 2014 = 100. 21 micron wool, Cotlook 'A' Index, Chinese polyester staple fibre (1.5 denier) and North Asian acrylic staple fibre (1.5 denier).
Source: Australian Wool Exchange; Cotton Outlook; Fibre2Fashion
Chinese cotton stockpile remains significant
Changes to Chinese Government support policies for their domestic cotton industry could significantly affect global prices. If stocks are of adequate quality, the Chinese Government could choose to partly replace falling imports from the United States by releasing national reserves at a faster rate. This would reduce the expected increase in China's demand for cotton from alternative suppliers such as Australia and reduce the expected increase in world prices.
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