As relations with China remain strained, Australian wool exporters used the pandemic to shore up a market that takes 90 per cent of their product. By Lucianne Tonti.
China and the Australian wool industry
In the midst of 2020, as the Morrison government made a series of decisions that further alienated the Chinese, the Australian wool industry launched an advertising campaign. It was titled the Merino Sisters and was created in collaboration with a Shanghai advertising agency.
The advertisement features Chinese celebrity Loura Lou meeting three sheep that live in a glamorous residence built into the side of rolling green hills. Wearing heels and oversized sunglasses, Lou is guided through the mansion by a border collie, as each sheep explains the qualities of merino wool to her. The campaign ran in partnership with Tmall, one of the largest online retailers in China, and over its duration 451,000 woollen garments were sold.
The ad was commissioned by industry group Australian Wool Innovation (AWI) as part of a larger industry-to-industry strategy that focused on strengthening the relationships between Australian woolgrowers and Chinese processors. AWI has a team of 30 Chinese staff in mainland China who provide counsel on how it can support the biggest buyers and processors of Australian wool. The partnership is co-dependent and mutually beneficial: Australia has almost a global monopoly on production of apparel wool and China has the biggest wool manufacturing industry in the world and the biggest market for wool products.
During the pandemic, this has become even more important. Demand declined in various markets, as each country met different successes in containing the virus. AWI made the decision to focus on bolstering the commercial relationship with China as the world went into the first round of Covid-19 lockdowns. It paid off. Sales to China rose from 85 per cent of the total Australian wool clip to 90 per cent. The next largest market is Italy, which buys 5 per cent.
Stuart McCullough, the chief executive of AWI, has been travelling to China since 1989 and says it’s important to understand “the cultural sensitivities and sensibilities” of doing business there. He acknowledges that despite good relationships in mainland China, the tensions between Beijing and Canberra make it a difficult time for the industry. “There aren’t many Australian woolgrowers that we come across in our travels in the bush that don’t raise it as item one in conversation,” McCullough says. Still, he has “confidence that right now wool is not at the top of the agricultural hit list for China”.
This confidence is because of the mutually beneficial nature of the trade partnership. Australia produces 85 per cent of the world’s apparel wool, which means China simply can’t get enough wool in comparable quality or quantity elsewhere. “If they could go and get the equivalent quality of Australian wool in South Africa,” McCullough says, “we’d be a lot more anxious.”
The second part of this reciprocal relationship is that wool processing in China is a huge industry. McCullough estimates wool goes through 16 processes to convert it to a consumable product, which means China is adding significant value compared to some of the other exports that have been sanctioned. “If you consider a product like barley – when Australia ships barley there, it goes into a brewery, and it’s converted into beer. That’s a very short supply chain. When a bottle of wine goes up there, it hits the table, it’s drunk and done. There’s no value-add supply chain in China for a bottle of wine.” By contrast, the supply chain for wool is “very long and contorted; there’re lots of people dependent on textile machinery in mainland China converting wool into garments”.
Melissa Conley Tyler, a research associate at the University of Melbourne’s Asia Institute, supports McCullough’s theory. She says China has been very strategic about which imports to block. “It’s chosen areas where it either doesn’t care very much because the main people harmed are individual Chinese consumers or where it actually helps the national objective.” Placing restrictions on imports of Australian wine and lobsters, for example, is annoying to Chinese consumers, but blocking them doesn’t harm an industry and the people working in it. According to Conley Tyler, blocking imports of coal actually stimulates domestic production, which serves one of China’s national objectives.
By contrast, iron ore remains unscathed because without it the Chinese economy would suffer. As with wool, they can’t get it elsewhere. Conley Tyler says “it would definitely hurt China’s economy to cut the supplies of Australian wool”. She says if Australia did something that China perceived as significantly egregious, China might be willing to hurt itself, but there is also a range of things China can do to signal displeasure that aren’t about trade.
China’s motives are not just about Australia; they want to discourage other countries from behaving similarly. “When Australia does something that China construes as provocative, it has to have a clear response to demonstrate to other countries it’s a bad idea,” says Conley Tyler. Some of the other actions to draw the ire of the Chinese include calls for an inquiry into the origins of Covid-19, banning telecommunications giant Huawei from building Australia’s 5G network, taking sides in the South China Sea territorial dispute, and tightening foreign investment laws. The next thing to watch for, Conley Tyler says, are decisions that will be made regarding arrangements with international universities under the Foreign Relations Act. “If the minister decides to invalidate the agreements for the Confucius Institutes across Australia, that would be big and symbolic, and China would feel it had to have a response,” she says.
Australian Wool Innovation is funded by 60,000 woolgrowers to research, develop, certify and market Australian wool to international buyers. As with any industry, lack of diversification in the market is risky, especially given the volatility of the Australian–Chinese relationship, but McCullough is adamant China is the best partner for Australian woolgrowers. He says the Chinese have been the dominant buyer of Australian wool for about 25 years and their consumption of wool is unparalleled. “No other country has ever dominated consumption of Australian wool like China has,” says McCullough. He insists there isn’t an alternative: “It’s not as though we can just go and find another China. There is no other China. There is no other place that has affluence, population and climate to suit the consumption of wool.”
McCullough says this is because consumption of wool relies on three trigger points. The first is the weather: the climate has to be very cold. “Not Melbourne cold,” he clarifies. “I mean the type of cold where you’re going to work in a foot of snow.” The second is that you need a large population: Australia has a population of 25 million, compared with China’s 1.4 billion. The third is affluence, because wool is a luxury fibre and it’s expensive. “China has always had the climate and the population to consume wool, but they haven’t always had the affluence,” says McCullough. “In the last 20 years there’s a middle class that’s emerged in mainland China along with great affluence, so it makes it the perfect place for mass consumption of wool.”
In 2018, Australia and China celebrated 50 years of wool trade. In those five decades China has become the dominant processor of wool in the world. Converting almost all of Australia’s wool into yarn and garments requires infrastructure and processing facilities at enormous scale and, currently, nowhere else in the world has capacity anywhere close to China’s. According to McCullough, it would take Australia 10 to 15 years to build the facilities and train a workforce that could process even 20 per cent of Australia’s wool. He goes on to point out that Australia doesn’t have the capacity to be a major consumer of wool, either. “Ultimately, of the 305 million kilograms of wool produced annually in Australia, Australia only consumes half a per cent.” Even if there were a return to local processing, “you’d be processing it to ship it off to overseas destinations”.
The Merino Sisters advertisement ends with Loura Lou leaving the mansion. Before she walks away, she turns to her canine guide and says, “I never give compliments, but … the merinos are special.” Special is an apt way to describe the trade partnership between China and Australia’s woolgrowers. Hopefully this is enough to secure its future.
This article was first published in the print edition of The Saturday Paper on July 24, 2021 as "On the sheep’s back".
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