German Perspective - 22.4.14
22/04/2014
The warm winter and the impact this had on sheep and lambskins was the start of a change in the long-term positive price trend for all kinds of raw materials. With the shutdown of a great part of the tanning industry in Hebei province due to environmental controls, the trade has had to learn that some of the leather production had been supported by the continuing hunt for cheaper production locations and not so much by the demand for leather itself.
The financial problems and the fading attraction to produce leather due to declining profitability has become an additional topic for the analysis of the raw material and leather markets. The extremely long upward trend for hides and skins which began in 2009 and saw very few phases of correction has to be reviewed. There is not a fundamental problem with leather demand and this suggests that we are not in front of the major correction in the raw material markets.
Most reports and statements are pretty relaxed about the potential risk every player has with regard to a drop in prices. As long as the tanning industry has to return to the raw material market to replenish their inventories and to feed the drums, the risk is reasonably limited. However, this only applies to the balance of supply and demand and does not take into account the influences the raw material business is facing from financial or production factors.
From our perspective, the balances in some segments have changed quite a bit and might now face significantly greater challenges than in any time in the past five years. There has been a collapse in the market for nappa lamb and sheep in the past weeks. Lamb and sheep leather can be used for a number of leather articles which are made from bovine and if price matters, it is going to be interesting to see how flexible brands, retailers and consumers are. If they are flexible, demand for bovine will eventually decline and so will the prices.
However, this is only something for the flexible players ones and not for the 'big ships' which are bound to their standards and budgets. It will show if the leather business is flexible or if it has become just a rigid production unit for the global brands.
Business this week has been difficult again. Automotive-related hides are still doing quite well, every day there is a tanner who needs to buy, but dairy cows continue to suffer. A lot of the problems in Hebei have been rectified for the moment, but a new sale or destination does not mean the problem is fixed until the money is in.
Demand was focused on high and low-quality hides. Heavy bulls moved at steady to a fraction lower and low grades were easily obtaining steady money. Where the real prices for dairy cows are today is anybody’s guess, because the price ranges mentioned from the resales are very wide (up to $8) and the tanning capacity problems have not been solved.
The kill: The kill dropped sharply, which is normal before Easter. This and next week are short by a day and so supply will be reduced.
What we expect: For the coming weeks we have to live with unclear situations. There are rumours that the controls of Hebei will now be extended into Shandong province, which will cause more problems if true. As long as the rumours swirl, buyers will remain cautious. For the regular supply chains it will mean little other than buying will be a bit easier in the weeks to come with prices easing.
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