By and  on August 7, 2007

The Chinese government's announcement that the country's wool quota for the year had been filled has taken the global wool industry by surprise and raised concerns there could be sharp increases in tariffs on its raw wool imports.

The Chinese Ministry of Finance & Commerce said July 17 that it was halting applications for wool quota from Chinese importers and mills until September and, as a result, the country said it would impose tariffs that could reach as high as 38 percent for shipments through the rest of the year.

The news had an immediate market impact, with many wool growers withdrawing their wool from national sales when they resumed last week and wool prices plunging by 7 percent. Uncertainty over quotas was not the only factor influencing growers. The Australian dollar reached an 18-year high against the U.S. dollar of 88.11 cents last month, causing discomfort for many Australian exporters.

China's move blindsided the global wool industry, which believed it was operating well within quota levels that have remained unchanged for more than two years. According to statements from Australian Wool Innovation and the American Sheep Industry Association, China's annual wool quota has stood at 632.7 million pounds of raw, also referred to as greasy, wool since 2004. At the end of May, China's Ministry of Finance and Commerce said 324.1 million pounds of the quota remained to be allocated to importers. However, only six weeks later, the Chinese government agency said only 33.1 million pounds remained.

Government and wool industry officials haven't received any clear explanations from the Chinese as to why or how the remaining quota had been filled so rapidly. Rita Kourlis Samuelson, marketing director for the American Wool Council, a division of the American Sheep Industry Association, said she believed China had mistakenly made its calculations using data for clean wool instead of greasy wool. The numbers could be off by as much as 30 percent as a result, she said.

"It's never happened this early and it was so sudden. No one was seeing that the quota was filled," said Samuelson. "It's unsettling when a government can make such a huge decision so unexpectedly."

The U.S. is the sixth-largest exporter of wool to China, shipping 11.6 million pounds of wool, valued at $15.6 million, to the Asian nation in 2006. The situation isn't serious for the U.S., since the domestic shearing season has concluded and the majority of wool supplies have already been sold. But for Australia, China's largest wool supplier, high tariffs could significantly impact not only the global industry, but the country's economy.Australia is the world's largest exporter of wool to China by a wide margin, shipping 410.2 million pounds, valued at $996.9 million, to the country last year. This represented about 67 percent of Australia's total wool exports. New Zealand is a distant second, having exported 78.9 million pounds of wool valued at $111.6 million in 2006.

The news of the tariffs came as Australia was beginning its shearing season, meaning the bulk of its comparatively massive supply had yet to enter the market. The country is also dealing with the impact of a drought that has just broken but has taken a toll on supplies. According to Woolmark Co., the Australian supply is expected to fall by 121.3 million pounds, or 11 percent, this year. Demand has remained strong, but lower supply levels have sent already high prices even higher. Wool started the year at $3.25 a pound and had reached $3.83 a pound by June 1.

However, Australian wool industry officials acknowledged quotas nearly reached capacity last year and that data indicated considerable increases this year. In May, the industry learned China's wool imports were up 22 percent over the previous year.

"Clearly, the rate of imports into China indicated to us that by September the quota was going to be close to being filled," said Brian van Rooyen, deputy chairman of Australian Wool Innovation. "So, sure, we've had the problem now in July, but it would have hit us in September or October in any event. You don't have to be a rocket scientist to work out that if we are running at 20 percent-plus above last year's rate, we are going to breach the quota."

Greg Weller, executive director of WoolProducers Australia, agreed there was some expectation quotas could be filled.

"I don't think anyone was really in a position to predict that it would come this early, so it certainly has been big news for the industry," said Weller.

Chris Wilcox, Woolmark's chief economist, noted that while the quota has been allocated, China has yet to actually import the raw material. According to Wilcox, China had imported about 53 percent of the annual quota by the end of June."So it doesn't really prevent the Chinese from importing wool, but because there's no more quota to be allocated from the central government, it does cause some uncertainty and concern that largely revolves around the uncertainty for China and who might be holding the quota that's been allocated but which hasn't been yet used," said Wilcox. "We've got to the situation now where those people who have been holding that quota in China could say, 'Well, rather than importing this wool, I could maybe sell the quota to somebody else who wants to import the wool, at a price.'"

Chinese and Australian officials are slated to meet later this week, according to van Rooyen.

"We'll get a much better read of the situation hopefully then," said van Rooyen. "I think within a couple of weeks we'll probably see an announcement, hopefully, that will say that there is still quota available to be used and they will still be issuing quota, and that they will move to a more transparent system."

If that doesn't happen, van Rooyen believes wool is likely to be a prominent issue when the Chinese president visits Sydney next month for the Asia-Pacific Economic Cooperation meeting.

"Wool is the second biggest Australian export by value to China, bigger than natural gas, bigger than copper, bigger than coal, second only to iron ore," said van Rooyen. "It's in the national interest that this gets resolved and therefore I would suggest that it will be on somebody's agenda and a very high place on the agenda. The issue here is that the Chinese processors need our wool as much as we need them to buy our wool. Therefore, it is going to affect their manufacturing and their exports, and it is an important issue for them."

Wilcox is optimistic the limited available global supply of wool and its high demand will help lead to a quick resolution.

"We're in a very, very different supply situation to what we've seen at any time in the last 17 or 18 years," said Wilcox. "We have a situation where we have a very low level of production out of Australia and globally, and we believe that stock held in Australia, both by growers in their brokers, sheds or on farms, is probably at a level that we haven't seen probably for around that 17-year period. So the total availability of wool for this season will be at a very low level and that will really help support prices, we think."Wool has grown in popularity among retailers and vendors in recent years as a result of the higher margins it fetches. Nate Herman, director of international trade at the American Apparel & Footwear Association, believes there is potential for higher costs along the supply chain.

"I think it will impact our members significantly, but I think they haven't responded yet because they haven't heard about it," said Herman. "It will take a few weeks to a month for people to start feeling the impact of this."


TOP 10 WOOL SUPPLIERS TO CHINA - 2006
QUANTITY IN POUNDS
VALUE in U.S.$
1. Austrailia
410.2 million
$996.9 million
2. New Zealand
78.9 million
$111.6 million
3. Uraguay
28.8 million
$39.5 million
4. Mongolia
12.1 million
$4.5 million
5. South Africa
11.6 million
$26.1 million
6. United States
11.6 million
$15.6 million
7. France
9.9 million
$10.5 million
8. United Kingdom
8.3 million
$10.2 million
9. Kazakhstan
7.7 million
$5.5 million
10. Argentina
4.1 million
$7.1 million

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