Brexit: Further Implications for Wool

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Brexit: Further Implications for Wool 

There has been much discussion about the impact of the UK’s recent vote to leave the European Union. The decision, generally referred to as “Brexit,” sent stock markets sliding and tongues wagging, but as the dust settles Chris Wilcox, chair of the IWTO Market Intelligence Committee, takes a measured look at the implications for our industry. You can also read Chris's initial take on Brexit here.

IMF revises growth forecasts downward

The International Monetary Fund (IMF) has released an update to its forecasts for 2016 and 2017 in the wake of the surprise Brexit result. Prior to the vote, the IMF saw the world economy on track for a slow, if lacklustre, recovery, but was planning to revise upwards the forecast for global economic growth in 2017.

The Brexit vote has put paid to that and caused the IMF to revise its economic growth forecasts for 2016 and 2017 down. The IMF also noted that as the when and how the UK leaves the EU is still unfolding, there is considerably uncertainty about the prospects for world economic growth in the next two years.

The IMF has wound back its economic growth forecasts in 2017 for all of the major European Union countries, with the largest cut being for the UK. It now expects the UK economy to grow by just 1.3% in 2017, compared with its April forecast of 2.2% growth. It has also wound back its forecast for economic growth in the UK in 2016. This suggests that economic growth in the second half of 2016 and into 2017 could be quite subdued. This may hurt retail sales over the crucial Autumn/Winter period in the UK and in the Euro countries.

This, in turn, would put a dampener on demand through the wool textile industry and, potentially, on raw wool demand. 

Implications for specific markets

Australia Herd Sheep IWTO Wool Australia

The short term effect of Brexit on the Australian raw wool market is limited largely because only a very small proportion of Australia’s wool exports go to the UK (just 0.4%) and the Australian and UK wool do not compete as they are very different and used in different end-uses.

According to the British Wool Marketing Board (BWMB), 80% of British wool is broader than 32 microns and the remaining 20% is between 25 and 32 microns. The vast majority of British wool is used in carpets and upholstery, with some use in heavier weight jackets and overcoats (such as Harris Tweed fabric) and heavy knitwear. This is very different to the wool produced in Australia (over 80% is finer than 25 micron and virtually all of the remaining 20% is between 25 and 32 micron), which is used in light weight woven wear, knitwear and next to skin wear.

This means that that very little of Australian and UK wool compete in any of the major end-uses in any of the major wool processing countries. 

New Zealand

This is not the case for wool from New Zealand. New Zealand’s wool production profile is similar to the UK’s, with 74% being broader than 32 microns, 20% being between 25 and 32 microns and 6% is 24 microns and finer (Beef + Lamb NZ). Furthermore, 7% of New Zealand’s wool exports went to the UK in 2014/15.

Prior to the vote, the pound was at around NZ$2.05. It fell to a low of NZ$1.75 around 10th July, then recovered a little to NZ$1.89. Even now, this is an 8-10% drop in the pound against the NZ$. This makes British wool that much cheaper than NZ wool, which means it is better able to compete in both the UK market and in key exports markets (such as China). As a result, there seems to have been a negative impact on NZ wool even in the short-term. On the other hand, of course, the lower pound in principle is a benefit to wool producers in the UK. 

Other major wool producing and exporting countries

The impact of Brexit on the other major wool producing and exporting countries is probably relatively small. South Africa’s wool production profile is similar to Australia’s and so there is very little direct competition from UK wool. As well, only about 0.6% of South Africa’s direct exports go to the UK. Argentina’s wool production profile is a little broader than Australia’s and South Africa’s (64% is finer than 25 micron, 35% is 25 to 32 microns and 1% is broader than 32 microns), but is still finer than British wool. About 2% of Argentina’s wool goes to the UK.

Finally, for Uruguay, 62% of its wool clip is in the 25 to 32 micron range, 34% is 24 microns and finer and just 4% is broader than 32 microns. Between 1%-2% of Uruguay’s wool is exported directly to the UK.

Chris Wilcox is the Executive Director of the National Countril of Wool Selling Brokers of Australia.

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