Cavalier hopes increased wool supply from main shear will arrest spike in prices
Cavalier Corp. [NZX: CAV] is hoping an increase of wool coming onto the market during main shear will arrest a spike in prices of coarse wool in a market where the carpet maker has limited ability to raise its own prices.
Coarse wool used for carpets is now 40 to 50 percent above year ago levels, ASB Bank said in its latest Commodities Weekly report. The clean price for 35-micron wool was $5.70 per kilogramme last week, up from $5 a couple of months ago and $4 a year earlier, although lower than the $7 peak in 2011, chief economist Nick Tuffley said.
Cavalier, New Zealand's only listed carpet maker, was hurt during the 2011 peak in wool prices when it was unable to raise prices enough to cover the increased cost of the wool, crimping margins. The company is watching the current market spike "very closely" although it is hopeful increased supply heading into the nation's key main shear season from December to early February will stabilize prices.
"I think once that weight of wool comes on to the market you will see a correction," managing director Colin McKenzie told BusinessDesk. "We are watching it very closely. If it's a repeat of last time, it won't be good news for anybody. If you look at the charts, it's a very steep incline."
McKenzie said price increases appeared to be caused by a lack of supply rather than an increase in demand, with only 300 bales of good carpet wool available among some 7,000 bales at last week's sale.
The nation's worst drought in 70 years has reduced stock numbers combined with a seasonal low of wool availability, he said.
Cavalier won't be hit by higher costs at this stage as it has cover in place on forward contracts, he said.
"There's less sheep and there's a seasonality side of things," McKenzie said. "This is a bit of a hole in the supply year, not a lot coming forward but shearers are starting to shear now and wool will be coming onto the market."
Main shear typically accounts for about 60 percent of the annual cross-bred wool clip, according to Barry Pullin, president of the New Zealand Shearers Association.
ASB's Tuffley said increased demand from construction activity in Christchurch and Auckland could spur more demand for carpets as lower sheep numbers constrain supply, putting upward pressure on prices.
Cavalier is evaluating its prices but it has to be careful to remain competitive, McKenzie said.
"You have got to be careful at that end too, you don't want to price yourself off the market, you have got to line yourself up with your competitors and also competitive fibres, so there is only so much elasticity," McKenzie said. "We know from last time we couldn't lift the prices of our finished goods of our carpets high enough to offset the increase in price, so we had to absorb some of that pain ourselves
Shares of Cavalier rose 0.6 percent to $1.83 and have gained about 9 percent this year. The shares are rated a 'buy' based on the consensus of three analysts polled by Reuters, with a median price target of $1.96.