WANDILE SIHLOBO: It’s a good time for SA to diversify wool export market

It has been nearly two months since the Chinese authorities temporarily suspended wool imports from SA because of the foot-and-mouth disease outbreak earlier in 2019.

Recent communication from domestic wool industry group Cape Wools SA, following a meeting with its Chinese counterpart, suggests there could be further delays before the suspension is lifted due to recent changes to Chinese government departments such as agriculture and customs, and the outbreak of African swine fever in some parts of China. These are the Chinese agricultural ministry’s current priorities.

Depending on how this matter unfolds in the coming weeks, there are likely to be implications for the agricultural trade balance in 2019, as wool is among the top 10 exportable agricultural commodities in SA. In 2018, wool accounted for 4% of SA’s agricultural exports of $10.6bn.

What makes the Chinese decision to suspend SA wool imports particularly concerning is their contribution to total domestic exports. Over the past five years, China has accounted for an average of 71% of SA’s wool exports by value. The other major markets for the SA wool industry have been the Czech Republic, Italy, India, Bulgaria, Germany, the US, Malaysia, Japan and Mexico.

While this heavy reliance on the Chinese market might have served SA well when there was minimal trade disturbance, today it is proving to be a challenge and has raised questions regarding the desirability of deliberately diversifying our wool export markets over the medium to long term to avert a similar challenge in future.

Although this would be a necessary approach, it would be hard for any country to thrive in the wool market without some level of reliance on China due to its dominance of the world market for woollen products. China accounted for an average of 62% of global wool imports by value over the past five years.

That said, there are several other countries SA could either export to, or export more to, to increase its market share as a form of diversification. Among these are India, Italy, the Czech Republic, South Korea, Egypt, Thailand, Bulgaria, Japan, Germany, Turkey, Taiwan, Lithuania and Belgium. These countries collectively accounted for 27% of global wool imports in 2018.

Most importantly, SA already has a presence in these countries, albeit currently only a small share of their import volumes. Therefore, one can assume domestic industry players are somewhat familiar with the technical necessities for wool exports to these countries, so the barriers to entry should be relatively few.

The competitors SA would most likely encounter within these markets are similar to those that are currently supplying China, namely Australia, New Zealand, Uruguay and Argentina, among others. Given that in the past two years SA was the second-biggest supplier of wool to China, this suggests the country could also be competitive in other markets and should be able to increase its market share in at least some of them.

In recent history, one of the periods where SA wool exports to China were suspended due to a foot-and-mouth disease outbreak occurred in 2011, but the effect then on export values was minimal as the matter was resolved within a few months.

As things stand, I am concerned about the potential effect of the latest wool imports ban on the SA agricultural trade balance, and the growth of the wool industry in the medium term.

In the near term, what would be also key for SA is to regain a foot-and-mouth disease-free status from the World Organisation for Animal Health so that necessary processes to resume trade can begin. But the timeline for these is unclear at this point, and the process will need active engagement from both the SA government and the private sector with necessary stakeholders.

In the long run, however, diversification of our wool export market should be one of the domestic industry’s strategic goals.

• Sihlobo is chief economist of the Agricultural Business Chamber of SA.