Wool venture has exporters jittery

UNDER PRESSURE: Shrinking supply and increasing competition for very little reward was behind his company's decision to withdraw from firm offer trading, wool exporter G Mondiano (NZ)'s managing director.

26-05-2008 | Hugh Stringleman

Wool exporters are nervously awaiting the business plan of the new strong-wool joint venture announced last week between growers and PGG Wrightson, as Hugh Stringleman reports.

Potentially more than half of the annual throughput of established wool exporters could be captured by the new venture, which has its own export capability in Bloch & Behrens (NZ).

Thin margins and lack of profitability for the large risks and high cost of finance have exporters under considerable pressure.

The NZ clip is only half of the volume it was in the 1980s and several overseas-owned exporters have already folded their tents.

G Modiano (NZ), which exports about 10% of the clip, will "cease firm-offer trading" on June 30 and only buy on indent for its parent company's top-making mill in the Czech Republic.

Managing director Neil Wilby, 35 years in the wool trade, said shrinking supply and increasing competition for very little reward had convinced his company's principals to withdraw.

Good trades generate margins of 3%, but big firms could turn over $100 million a year and only have one or two million dollars to show for it.

"It is lack of profitability, related to the huge risks, coupled to high interest rates," Wilby said.

Collectively, wool exporters do not want to comment negatively about the PGG Wrightson move into The Wool Company (TWC) joint venture (interim name only).

"We don't want to just criticise when the plans of the venture have not yet been announced," one exporter said.

Privately, exporters expect TWC will continue to need their services to liaise with manufacturers, buy at auction, make shipments and finance transactions.

Full "vertical integration" hasn't happened yet, because the new venture doesn't own scouring capacity and Bloch & Behrens accounts for only 6% of annual exports.

They point to New Zealand Merino's continued use of exporters, even for contracted wool sales.

New Zealand Merino, a joint venture between growers and PGG Wrightson in the same way as envisaged for TWC, has no intention of assuming the functions of exporters, chief executive John Brakenridge said.

Nevertheless, many in the industry fear exporters will feel the brunt of the reform, if Wool Industry Network (WIN) achieves its goals.

According to the Model for Change strategy published before Christmas, these are unification of growers, branding and direct marketing.

Through the $46m PGG Wrightson Wool deal, unification has jumped ahead without need for a lengthy and uncertain float and prospectus for Wool Grower Holdings (WGH).

The new venture will trade for the 2008-09 wool season, beginning on July 1, by expecting growers to consign to auction or sell privately in the same volumes PGG Wrightson has been trading.

It will be presuming on growers' loyalty and have financial backing, probably at least initially, from Wool Research reserves via Meat & Wool New Zealand.

Because official industry figures are no longer gathered, exact market shares are not known, but PGG Wrightson claims 45% "as broker".

It is also the biggest private buyer in the country and much of that wool is then listed in auction catalogues.

"We never know whether PGG Wrightson is acting as broker, seller or buyer," one exporter said.

"It buys wool at the farm gate and then sells it at a higher price in the auction room, which always puzzles me that more farmers don't object."

Exporters own more than 80% of total exported wool, according to Statistics Department returns from export documents.

The biggest of these is NZ Wool Services International (listed company), J S Brooksbank (owned by Elders), Segard Masurel (French family), Fuhrmann (Italian family and NZ private), H Dawson Sons (UK family) and Modiano (Italian family).

A second tier includes Bloch & Behrens (NZ owned), John Marshall (NZ private), J L Crichton (NZ private) and Schneider NZ (Italian family).

As the Council of Wool Exporters often says, there has never been a default of a member in 150 years of exporting and growers are now paid 11 days after the fall of the hammer.

"But people do get into trouble and a lot of companies are no longer with us," council president John Henderson said last year.

"Back in the 1980s there were probably 45 firms on the benches and today, less than half of that."

Wool Services International (WSI) managing director Michael Dwyer said WIN "is still talking to most large exporters".

He expressed surprise at the PGG Wrightson and WGH announcement, saying "I can't see yet what it will achieve for growers".

Earlier in the WIN consultation process, it was rumoured that WSI and Christchurch neighbours Wools of New Zealand could form the base of a fibre firm with WIN assistance.

Then WIN was thought to have switched its approach to convincing four major firms - WSI, Brooksbank, Masurel and Dawson - to join the structural reform.

An issue now for WGH chairman John Perriam and his new board is whether enough money can be found to include WSI under the joint-venture umbrella, given its market capitalisation of $25m.

Agribusiness owner Alan Hubbard, of Timaru, is a 64% cornerstone shareholder of WSI and might be sympathetic to the aims of the growers' collective, at a good price.

The latest WSI directors' report said: "We are following the WIN initiative with interest and await developments. We remain ready to co-operate with industry participants, if required."

The venture would gain two large wool scours and considerable exporting capability.

But initial debt of $70m, less whatever PGG Wrightson and WSI left in, by way of joint ownership, would be a large load to finance from $500m annual turnover.

Dwyer wanted to point out the market for NZ strong wool is recovering, with prices in NZD now 25% higher than the low point.

"We expect substantial further rises in the next 18 months as there is a shortage of supply."

Dwyer said WSI intends to redouble its efforts in the Purelana-branded initiative with contracted growers, for which no financial support has been received from WIN.

Another branded strong-wool initiative, Romney NZ, said it had received market consultancy support from WIN, as other grower groups had.

"We are on our way, with a container of wool going to Nepal (for rug making) at present, but it all takes longer than you expect," general manager John Bates said.

Surprise has also been expressed that Wools of New Zealand wasn't rolled up into last week's announcement.

The grower-owned technical adviser and brand licenser would be an obvious resource for a fully integrated fibre firm.

Chief executive Tim Lonsdale presumes owner Wool Research Inc is "protecting these assets while a new industry structure is emerging".

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