Descended from sheep the Vikings brought to Iceland, Icelandic sheepskin is thicker, coarser and long, with 4 – 6″ pile (wool length). Australian sheepskin rugs, on the other hand, come from sheep of Merino wool heritage, with wool that is shorter, denser and softer, with pile around 2.5″ in length. Because of its density, the loft (ability to stay upright) of the Australian sheepskin wool is very high, whereas the longer Icelandic wool lays flat.
Australian skins are generally a larger size and have a round, uniform shape. Australian skins typically have a higher wool density. This is largely due to the sheep breeds in Australia. To achieve premium-grade standards, the Australian sheepskin rug must possess both the necessary wool density and length, which is a minimum of 65 mm. Wool density determines the ability of the wool on the rug to remain upright and straight longer. Also important is the wool's loft, or its ability to stay upright and straight.
It's entirely a matter of preference, as they're both great rugs of the highest quality. If you're looking for a long, shaggy sheepskin rug, Icelandic is the choice. For a soft, plush one, choose Australian.
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