Gathering Momentum Trends and Prospects for

Fine Merino Wool

Chris Wilcox Chairman, Market Intelligence Committee International Wool Textile Organisation Executive Director, National Council of Wool Selling Brokers of Australia

Balmoral Sire Evaluation Group 2016 Field Day 8th April 2016

Messages

Ø  Total world and Australian wool production low… …BUT higher superfine wool production

Ø  Wool prices perform better than prices for other commodities… …BUT narrow margins for superfine wool

Ø  Some positives, some negatives for short term demand… … BUT demand for superfine wool growing… …AND longer term demand trends and prospects positive

0

200

400

600

800

1000

1200

1400

1600

1800

mkg clean

Production Opening stocks

Wool Production Flat, Stocks Low

Source: Poimena Analysis and International Wool Textile Organisation Note: The year refers to the season ending eg 2000 = 1999/2000 Data in 2015 is an estimate and data in 2016 and 2017 is a forecast Updated March 2016

2015 production 1,166 mkg clean

2016 production 1,148 mkg clean

70 year lows

2017 production 1,154 mkg clean

Stocks:Use ratio ~11%

Source: Australian Wool Production Forecasting Committee, ABS, ABARES Wool production is shorn wool; sheep numbers are as at 1st July Updated for forecast March 2016

Australian Sheep Numbers and Shorn Wool Production Remain Low

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20

40

60

80

100

120

0

100

200

300

400

500

600

Wool

Sheep

Wool (mkg greasy) Sheep (million) 2015/16 production 7%

to 322 mkg greasy

2016/17 production 320 mkg greasy

Lowest since

1923/24

0%

1%

2%

3%

4%

5%

6%

7%

0

20

40

60

80 mkg clean % of Total Clip

mkg clean

% of total

WORLD

Superfine Wool Production Pulls Back from Peak

0%

5%

10%

15%

20%

25%

30%

0

20

40

60

80 mkg clean % of Total Clip

% of total AUSTRALIA

mkg clean

Source: Poimena Analysis, AWTA, NZWTA, Cape Wools, FLA, Delta, American Sheep Industries, China Wool Textile Association.

Updated March 2016

Medium Merino Wool Production Drops Australian Wool Production by Micron Range Shares

Source: Australian Wool Production Forecasting Committee and Australian Wool Testing Authority

Updated: March 2016

0%

25%

50%

75%

100%

1991/92 1994/95 1997/98 2000/01 2003/04 2006/07 2009/10 2012/13 2015/16f

18.5um & finer 18.6-20.5 um 20.6-24.5 um 24.6um and broader % share

Month and year 18 micron 19

micron 23

micron 26

micron 28

micron Merino

Cardings

July 1999 +125% +88% -22% -29% -29% na

July 2005 +30% +18% -3% -25% -38% -50%

July 2015 +8% +4% -2% -21% -32% -22%

10 year average +27% +14% -5% -31% -45% -37%

5 year average +14% +7% -4% -30% -43% -34%

March 2016 +9% +4% -2% -28% -39% -19%

Micron Price Differentials Narrow for Superfine Wool % difference relative to 21 micron wool

Source: AWEX

Wool Outperforms Other Commodities % change March 2016 vs March 2015 – US$ base

Source: AWEX, The Economist, CotLook, PCI Fibres Prices to March 2016 Interiors Wool – NZ Crossbred wool

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

18 micron

21 micron

26 micron

Merino cardings

Interiors Wool

Cashmere Cotton Polyester Staple

Acrylic Oil Metals

% change y-o-y

Wool

Other Commodities

Demand - Drivers and Prospects 2015/16 and 2016/17

•  Mixed economic growth in 2015-2017 –  Solid in US and UK, improving in Europe and Japan –  China slowing and in transition – a key for wool

•  Positive consumer confidence in the US, Europe and Japan

•  BUT… disappointing results for retail sales in some countries

•  Strong demand for double-faced woollen fabric – will it continue?

•  Wool textile industry stocks now under control? •  High price ratio for wool against cotton prices and

synthetic fibres – does it matter? •  US$ predicted to be strong against A$, but how

accurate are the forecasters?

Positives but risks

Clothing Retail Sales in the Major Wool Consuming Countries

% change y-o-y 2010 2011 2012 2013 2014 2015 Oct-Jan

2014 2015

China +25.8% +25.1% +17.7% +11.5% +10.8% +9.5% +8.9% +6.6%

USA +6.0% +3.4% +0.9% +1.3% +1.1% +3.8% +5.1% +1.5%

Japan -6.3% +3.2% -0.4% -0.7% -0.5% -2.3% -1.0% -3.3%

Germany +1.2% +0.9% -0.3% +0.1% +1.3% +2.6% +2.1% +1.6%

UK +5.4% +3.3% +1.5% +3.1% +5.2% +1.6% -1.0% +0.2%

Italy +0.8% -1.1% -2.3% -2.1% -1.3% +0.8% -1.1% +0.7%

France +2.8% +1.7% +0.6% +1.1% +1.2% +2.9% +1.6% +2.0%

South Korea +9.8% +8.6% +3.2% +0.8% +1.6% +3.5% +0.7% +5.6%

Source: Government statistical bureaus. Notes: Value of retail sales. China is for retail sales of garments, hats, footwear and knitwear. Japan is for

major department stores. Germany, Italy, France and South Korea is total retail sales.

The Craze for Double-Faced Woollen Fabric in China

•  Woollen fabric uses shorter wools (cardings etc.) as well as crossbred wool

•  Double-faced fabric is two pieces of woollen fabric knitted together during production, each of a different colour or shade

•  Garment doesn’t need a lining

•  Fabric used mainly for women’s coats for China market for sale in Fall/Winter 2015

Wool Textile Industry Stock Levels Pull Back from Highs

1

2

3

4

5

2009 2010 2011 2012 2013 April 2014

2014 April 2015

2015 March 2016

End 2016f

Early Stage Proc Spinning Weaving Knitting Garment making Interior textiles

Well above normal

Above normal

Normal

Below normal

Well below normal

Source: IWTO Wool Textile Business Survey Weighted results for China, Italy, Germany, Uruguay, Mongolia, Argentina, South Africa, Japan, France, Spain and the United Kingdom

What about the longer term? •  Growing demand for fine Merino wool

•  Long-term prospects for wool depend on global economic conditions and income growth, not relative production with other fibres

•  Demand for business-wear for men will continue to be a mainstay for wool

•  Knitwear a growth area, particularly with increased demand for active leisurewear and casual garments

•  Coats the best performers in womenswear for wool

•  Trade in other women’s wool clothing continues to fall

Demand for Fine and Superfine Wool Rising Australian wool exports by value

0

500

1000

1500

2000

2500

3000

A$ million

19um & finer

20-23um

25um & broader

Source: Australian Bureau of Statistics, Poimena Analysis Data to January 2016 12 month rolling aggregate

World Production of Wool and of Competing Fibres: Wool Cannot Compete on Volume

0

1000

2000

3000

4000

5000

6000

7000

8000

Wool

Cellulosics

'000 tonnes

Source: CIRFS, USDA, Poimena Analysis, IWTO Market Information Report 2015 Note: For wool and cotton the years are seasonal years i.e. 2011 = 2010/11 season

0

5000

10000

15000

20000

25000

30000

Cotton

Synthetic staple

'000 tonnes

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Jul-95 Jul-97 Jul-99 Jul-01 Jul-03 Jul-05 Jul-07 Jul-09 Jul-11 Jul-13 Jul-15

Wool:cotton

Wool:synthetic fibres

Source: AWEX, Cotton Outlook, PCI Fibres, CIRFS, Poimena Analysis Compared with 21 micron wool. Data to March 2016

Price Ratio

Wool Price Ratios With Other Fibres Rises to New Level

Apparel Wool Consumption Rises as Incomes Lift

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000 60,000 Income (US$/head)

Italy

UK

Turkey

Japan

USA

Germany

S Korea

India China

Spain

Australia

Russia France

Woo

l con

sum

ptio

n (c

lean

kg/

per h

ead)

Source: International Monetary Fund and Woolmark Apparel wool consumption is apparel NDA at retail average 2012-2014 as estimated by Poimena Analysis. Income is US$ GDP per head in 2015 on a purchasing power parity basis.

Trend Line

40%

13%

9%

10%

6%

8%

14%

sweaters Men's suits Men's overcoats Men's jackets

Men's trousers Other women's wear Women's overcoats

World Trade in Wool Clothing in 2014 (% share)

Source: IWTO Market Information 2015 Report, Foreign Trade Statistics, International Trade Centre, Poimena Analysis & Delta Consultants

Product Segment Prospects: Growth opportunities for fine Merino wool

Growth Mainstay Decline

Messages – Gathering Momentum Ø  Total world and Australian wool

production low… …BUT higher superfine wool production

Ø  Wool prices perform better than prices for other commodities… …BUT narrow margins for superfine wool

Ø  Some positives, some negatives for short term demand… … BUT demand for superfine wool growing… …AND longer term demand trends and prospects positive

Thank You!