The Leather Pipeline - 22.07.14
22/07/2014
The financial markets are beginning to wind down and the holidays in the northern hemisphere now seem more and more concentrated into a smaller timeframe from the end of July until mid-August. This used to be more stretched in the past, when the north began to go on holiday in early July and the south in August.
With holidays ahead many are wondering how the financial markets are going to proceed after the break. Financial investors are pulling out of their long positions in many commodities, as can be seen in oil and precious metals. Against all predictions they are well down, when many advisors were talking them up. At the moment the investors are wondering if it is time to buy or better to move out. Everyone is talking about supply issues for oil and it might be good to have the tanks full, but global supply and the money needs of producers are keeping prices well under control.
Also gold and silver have been considered as good investments, safe havens with all the uncertainties around the globe. In the end we have never seen the $2,000 per ounce once predicted as an interim target and the bullion price is struggling to maintain the $1,300 price. It seems that investors are focusing less on strategies and waiting from week to week to decide where to go.
Stock markets are slowly moving away from record levels, with investors getting increasingly worried about the various conflicts around the world and their potential effect on the global economy and businesses.
In the meantime China has reported second quarter growth of 7.5 %, which looks to be on target, but considering that this was mainly owed to infrastructure investments and government activity it was less exciting. Banks were lending about 20% more than a year ago to stimulate domestic demand, but looking at the corporate debts and financing problems even this is more worrying than promising.
After the World Cup we are returning to normality, which means that entertainment is back in the background and politics and the economy have come back into the foreground. The best example is Brazil itself, which was a fantastic host of the World Cup but now needs to go back to settling its economic problems. The shooting down of a Malaysian aircraft over the Ukraine on July 17 showed how much everyone can be quickly touched by local conflicts and that these are sometimes not just headlines from far away.
The currency market was affected by weaker-than-expected data in the European Union and in particular from Germany. The US dollar began to gain value; this was also in the expectation that quantitative easing in the US will end in the foreseeable future.
Market Intelligence
Only a few weeks left before we reach the peak holiday season. Tanneries in Europe are beginning to wind down and anything that hasn’t been delivered yet is being postponed until the reopening; everyone is trying to go into the holidays with as little stock as possible. Whether or not this is a wise idea is worthy of discussion because the storage conditions at suppliers might not be much better than those of tanneries, and sometimes are even worse.
It is the time when our market reviews inevitably become shorter if nothing special happens. This is indeed the case in 2014. The fundamental positions have not changed with sellers still feeling comfortable enough to hold onto their price stickers and buyers in the majority still being well enough covered just to pick at the edges. In the past week, sellers have even begun to believe that they are gaining the upper hand in the market again. Reports from various parts of the world claim that the downside is over and sales have been strong enough to build a scenario for higher prices again.
Well, the timing isn’t too bad. Tanners in Asia need to take a decision soon about when to replenish their raw material positions for the start of the next production season. Knowing that Asian buyers love to buy in a rising market but hate to take decisions in a weaker market, it is certainly a good strategical move; there is traditionally nothing more inviting for Asian tanners than a rising market.
We have to admit that we consider this as a strategy and not a market reality. If one has any trust in the export statistics and in the reported substantial decline in raw material imports into Wenzhou province, for example (not to mention Hebei province in the past three months), and if one looks at the congestion of containers that are still not paid for, and if one looks at the split and sheepskin markets, one cannot be full of confidence about the stories. It could still a smart move and with the necessary guts it may even be successful.
For the moment the price lists are showing steady levels and some are even teasing the market with higher asking prices, although from what we hear from the markets without too much success. However, the situation depends in the end on the price levels set by sellers and we have to be realistic: a majority of market players have no interest in allowing levels to slide any further. There is still too much expensive material in the pipeline that needs to be pushed through and digested in the leather pipeline. The stories of the good sales, lower supplies and steady demand may help the market situation in the short term, but looking into the future one has to ask if present levels can be sustained for a timeframe of six-to-nine months, which would cover the next leather season.
In no business should an individual seller be expected to lower prices for the sake of the long-term quality and prospects of the sector, and the leather pipeline is no different. Sellers are looking for better results than their competitors and returns for their investors. This is short term and doesn’t allow any long term-pricing strategies; it leads to attempts to swing with the trend and to do better than the competition.
In a publication like ours we have no interest in higher or lower prices and we do not have to please anyone in the pipeline. If prices are high, the returns should end up in the pockets of the farmer, with hides being turned into valuable leather products. If prices are low it will help the industry to promote leather as a material and will increase profits in production, leading to new investment and the development of new and advanced products. Price cycles have always kept the leather pipeline vivid, dynamic and creative, although many complain about that volatility because it is uncomfortable for each side depending on the way it moves. Nevertheless we believe that the price cycles are keeping the producers flexible and levels of innovation high. The more the markets stabilise, the more the pipeline industrialises, while the more price matters, the less special the product will become.
This is actually what worries us, and has done for a while, and this is where we are in conflict with the interests of the increasingly industrialised units along the leather pipeline. Run by managers, managed by budgets, focused on short-term yields and linked to the same type of businesses along the chain. Prices and products are more set by budget than by markets and manufacturers’ talent. This is limiting flexibility and creativity, which does not fit well for a raw material that is so lacking in standardisation. We don’t think this is old-fashioned; it’s not the modern way to turn a raw material that is unique and with plenty of variation into a uniform mass product that can only compete on price.
Under these conditions we continue to question the strategy of the marketers of hides, defending the prices of today instead of letting them slide somewhat. The intentions are clear. Apart from the fact that higher returns are better for packers, we are approaching the time when many tanners have to negotiate leather prices for the next season with their customers. Tanners traditionally welcome raw material price stability during these negotiations and prices that are a bit cheaper later on when they really need to buy the hides for the leather sold now.
Analysis of price trends in the markets is not only difficult because we do not have a dynamic daily market any more, but also because of a lack of critical reporting. Those who still dispose of a good archive of reports should compare the texts and numbers of some years ago to those for this year. You would certainly not have read about comfort and optimism with sales and export figures like those of 2014. If we trust in the prices for raw material and the sales positions claimed for salted material, then the missing hides have to be somewhere. The reply cannot just be lower production, because the numbers do not match even then; we all know that this will mean wet blue.
We have discussed this in the past. Salted prices are a tool for managing the revenues for wet blue hides and wet blue production is the tool for steering the inventory of salted hides. From what we know so far the wet blue capacities are absorbing most of the salted hides that are claimed to be missing. Well, it is like money; it is not gone, it just belongs to somebody else now. Potentially we could have more hides in the pipeline than many assume and we might also have a two- or multi-layer market in which prices drift apart. This means that it depends very much what you are looking for before you realise what it is you really see.
All this is theory, but it seems to us that it might be a really good option at the moment to think about what is possible rather than what is visible and not to be too narrow minded when it comes to market forecasts and options for the rest of the year. The summer and the holidays might be a good time to relax and play around with scenarios.
The split market is not really delivering much news. The little one hears is that the small volume sold is now at a certain price level. The market took a steep and deep dive, but if one looks at the price performance over the past 12-24 months, prices are still high. The market still has problems and there are still a number of containers stuck or on their way back to suppliers. However, the split market is also waiting for a clear direction for the time after the summer holidays.
The skins market continues to be in the same difficulties as before. For nappa production a real alternative to the fellmongers and tanners in Hebei province has not yet been found. Woolskins continue to be stuck. The Ukraine conflict still weighs on business in the country and on trade with Russia. Most suppliers to these markets remain pretty pessimistic. High-quality skins for the luxury market are still performing significantly better and are holding their levels.
The coming four weeks will be peak holiday season. In Asia it is still too early to think seriously about negotiations for new leather orders and in Europe people are simply not at their desks. Except for automotive and some big brands with year-round production, most of the trade is idle and peope are unsure what to expect. For us the key question remains this: has global leather demand been seriously hurt by the high prices of last season, or are the optimists correct that the prices for leather in the first half 2014 were not a negative factor for leather demand in general?
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