China threat driving Cavalier Wool’s push for scour assets

Chinese threat driving Cavalier Wool’s push for scouring monopoly

By Paul McBeth

The threat of Chinese wool scourers snapping up more local business is the driving force behind Cavalier Wool Holdings’ bid to secure a monopoly over New Zealand’s $60 million wool scouring industry.

CWH, a joint venture between carpet maker Cavalier Corp., Accident Compensation Corp’s investment arm, and private equity investor Direct Capital Investments, has asked has asked the Commerce Commission to sign off on a bid to buy rival Wool Services International’s scouring businesses, giving it control of the local sector. It would shut down the rival’s plants under the consolidation.

The local industry is under threat from rivals in China buying up more so-called greasy wool for export and processing in Asia. China has 20 times as many scouring lines as New Zealand and can undercut local businesses by 10-to-13 cents per kilogram, according to a report accompanying the application.

“New Zealand is not immune to the trends sweeping the scouring world associated with an aggressively expanding Chinese wool scouring industry,” CWH said in its application. “While not quantified, the acquisition will act to strengthen and enhance New Zealand’s wool scouring industry,” which it estimates employs 170 people.

If New Zealand doesn’t act to protect its scouring industry, it may follow European trends, which have been “competitively marginalised” or Australia’s experience, which has “virtually no domestic scouring industry,” CWH said.
Rationalisation in scouring, in the wake of a global downturn in demand for wool, had seen the number of New Zealand scours reduce to five from seven in recent years. Cavalier owns three and WSI has the other two.

If CWH is successful in its bid, it plans to centralise its North Island business in its own Awatoto site, mothballing its Clive line and closing WSI’s Whakatu plant. The South Island unit will be centred in CWH’s Awatoto plant, with WSI’s Kaputone also facing closure and sale.

“Over recent years, many Australian scours have closed and the surplus plant has been acquired by Chinese wool scourers and relocated to China,” it said. “There is every reason to believe they would acquire and do likewise with the NZWSI assets and hence there is every possibility that the counterfactual may involve the exit of the NZWSI assets from the New Zealand market.”

About 21% of New Zealand’s wool exports are shipped to China in greasy form. The country exported $635 million worth of wool in 2010, according to government data.

Late last year, wool prices recovered from a drawn-out slump as Chinese manufacturing activity stoked demand for the raw materials in the expectation that carpet-makers will need to restock their inventories this year.

WSI’s future is in the air with the stake of major shareholders Plum Duff and Woolpak Holdings up for grabs after they were placed in receivership. WSI chairman Derek Kirke hit out at the bid earlier this month, calling it a “frivolous” application that isn’t in the best interests of New Zealand wool growers, or the economy.

A report commissioned by CWH’s lawyer, Bell Gully, using the antitrust regulator’s model to determine the value of a tie-up found the biggest public benefit to be $79.1 million over a five-year period, and the lowest to be a gain of $8 million.

Nera Economic Consulting’s James Mellsop, Kevin Counsell and Will Taylor, said wool scouring is a high gross margin business that is very sensitive to shifts in volume, and that would damp any price hikes that naturally flow from a monopoly.

CWH managing director Wayne Chung didn’t immediately respond to BusinessDesk inquiries.

(BusinessDesk)

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