AUSTRALIA'S wool industry -- once courted by a range of buyers from Italy, South Korea, Taiwan and Germany -- has become almost entirely reliant on China, which has rapidly become the sector's biggest customer.
In March, 80 per cent of Australia's wool exports were sent to China.
In the past seven years, China's annual take of Australian wool exports has risen dramatically from 39 per cent to 68 per cent. Australia's second-biggest customer, Italy, only buys 7 per cent, down from 17 per cent.
Germany and Taiwan, which together imported 10 per cent of Australia's wool exports in 2001-02, last year bought virtually no wool from Australia.
And although Australian wool still commands a healthy price, some industry players are starting to worry about Australia's dependence on continued demand from China, and a gnawing fear is emerging that Chinese buyers may use their dominant position to influence prices.
Chris Wilcox, executive director of the National Council of Wool Selling Brokers, says mills and traders in China compete fiercely on price.
"We have seen evidence of that in the past two to three months, with China buying a lot of our wool and yet prices at auction being bid up.
"However, my worry about such dominant position is the Australian wool industry's exposure to sovereign or countrywide risks. If China experiences a disruption (such as we saw with SARS in 2003) and its buying slows as a result, then our industry is exposed.
"Equally, of course, when China is able to keep buying because of its large domestic market while others are not, then it helps our industry. A two-edged sword if ever there was one."
Since March, the wool price has risen from $7.25 a kilo to peak at $8.34, before coming back to $8.12 last week. Peter Morgan, from the Australian Wool Industries Secretariat, lists three reasons for the rise: "It was China, China and China. We had a little bit of a burst (of wool buying) from Europe in March. It has been driven entirely by China on the demand side. It is just absolutely dominant at the moment, taking over 80 per cent of our exports." Don Hamblin is the president of the peak grower body, WoolProducers, and runs a mixed farm near Nyngan in central-west NSW.
While he's grateful for the demand from China, Mr Hamblin would like Australia to develop a greater pool of potential buyers.
"I think we have been extremely lucky that we have had the Chinese there who are able to process our wool," he said.
"We would obviously like to see other countries become bigger processors of wool, particularly India and the former centrally planned economies of Russia and Poland.
"We would like to see them become major processors of wool again to give some diversity in the market."
The accepted wisdom is that wool is a luxury item, one where consumption rises with good times and falls with the bad times when consumers will delay the purchase of a new woollen coat or suit.
Mr Wilcox points out that during the 1998 Asian financial crisis Australia was producing much more wool, and the stockpile still cast its shadow over the market. Back then, prices fell below $5 a kilogram. "In this crisis, wool prices only fell down to $7.20, and I think the reason we are seeing the difference in the low point this time and the low point in 1998, is entirely do to with (short) supply," he said.
The Australian wool clip is the smallest it has been since 1925-26.
Australian wool production peaked at 1000kilotonnes, produced from 173million sheep, in 1989-90.
The Australian Wool Production Forecasting Committee recently downgraded its forecast for 2008-09 to 355kt -- 10.5 per cent lower than last financial year.
It said the short supply was due to the continuing poor rainfall across southeastern Australia and lower than expected fleece weights. And it expects a further fall to 335kt next financial year.
Mr Wilcox said the shrinking clip has wool businesses around the world "scrambling to try to secure volume, and looking at the way they manage their businesses".
Until 1959, Britain was the main buyer of Australian wool.
It was quickly overtaken by Japan, but Europe was also a significant buyer.
In the 1980s, China emerged as a major buyer.
Today, China is by far the world's largest importer of raw wool fibre.
"China is the one major export destination that we have seen an increase in volumes exported this season," Mr Wilcox said.
But not only is China buying more wool, it is buying finer, higher-priced wool.
Mr Wilcox said originally China focused on the medium or 21 to 24 micron merino wools. "But increasingly over the last four, five years they have been buying more and more fine merino wool and now they are easily the number-one export market for fine merino wool," he said.
"As their industry has developed and matured and improved their quality, so too has their demand for finer quality wools grown."
He said Chinese buyers are not only responding to the growing demand for fine wool used for trans-seasonal and high-end garments. They have also realised that while medium merino wools face stiff price competition from other fibres, notably cotton and synthetics, fine merino fibres have no real direct competitors.
Fine wool also commands a significant price premium over medium wool, and for years the Australian wool grower has been exhorted to "go finer".
And they have: in 1992-93 at the end of the wool floor price scheme, fine wool comprised 8 per cent of the clip. Today, it is 34 per cent. Despite the falling clip volume, double the quantity of fine wool is produced today, compared with 1993.
Mr Hamblin said the dedicated wool growers have stuck with merino sheep, and he rejects any notion the wool industry could become a cottage industry.
"At the end of the day we are still a $2.7billion a year industry," he said.
Mr Wilcox believes demand will increase.
"There is more and more optimism rising that the world economy will recover towards the end of the year, particularly the Chinese economy," he said.
And if demand rises, given the current low levels of supply, Wilcox said, "you could expect to see quite solid rises in wool prices over the next 12 months or so".
