US Perspective—17.03.09
17/03/2009
The Jacobsen Commentary and Market Opinion
Courtesy of www.thejacobsen.com
Better than expected
This has certainly been an interesting week with a confluence of economic events providing the best news for a long time with regard to the US economy. Wrapping up with a four-day rally on Wall Street, the week began with news that Citigroup reported two months of positive results, and retail sales figures in February were better than expected.
Friday’s headlines touted better than expected results from the Bank of America and General Motors announced that its restructuring plan is beginning to take hold and it won’t need the $2 billion government loan installment it had requested for March.
The US hide market has not fared quite as well as this week’s stock market. Steer prices fell around $4 and HTS into China are now in the range of $33 to $35, translating back to $26 to $28 FOB. There is very little price distinction between HNS, HTS, and BBS. The market for CBS is very soft. On an up note, sellers reported moving a fair amount of hides this week. While many traders remain bearish, a few are feeling that the market will soon be stronger.
Time will tell if this trading level will hold, rise, or fold but the answer will have a lot to do with how quickly consumers return in force and how much inventory of hides are sitting in warehouses around the world.
Slaughter estimates for the week are 623,000, up 20,000 from last week and down 10,000 from the same period last year. Year-to-date slaughter at 6,372,000 is 5.5% under the same period last year.
Finally, congratulations to Blake Krueger, chief executive officer and president of Wolverine World Wide Inc., who will receive the Excellence in Lifestyle Branding award from The American Apparel & Footwear Association at its 31st annual American Image Awards dinner at the New York Grand Hyatt Hotel on May 12.
It’s the economy … unfortunately
Washington released job losses for last week and they were not encouraging with 645,000 new claims up 15,000 from the week before and 5.3 million Americans now looking for work.
Hide traders are very bearish, conceding to lower prices following drops in the European and Australian hide markets a couple weeks ago. With Asian customers in a fairly strong position after cleaning up these cheaper hides, the pressure of a global hide supply has pushed back on the US supply. Whether this is the beginning of the consolidation of prices and the formation of a new trading range or a temporary downward movement will be determined in the near future.
In the opinion of several pundits, the biggest problem facing the industry is that many tanneries and packers have very large hide inventories. Even with shoe business picking up (but not at levels of 2008), it will take a long time to work through these stocks.
US export sales for week ending March 5 for hides and wet blue were 439,900 hides and 125,700 wet blue totaling 560,600. This was approximately 42,000 or 7.5% under that week’s slaughter of 603,000. Exports for the week were 567,400 hides and 83,600 wet blue, totaling 651,000. This exceeds slaughter by 48,000 or nearly 8%. Outstanding sales for hides stand at 5,123,000 for the week. The hide market should not be greatly affected with this week’s relative close balance of slaughter, sales, and exports.
For whom the bell tolls
Plenty of news can be described as gloomy. Unemployment reached a 25-year high, Herman Miller announced factory closures, Foot Locker, K Swiss, Brown Shoe, and Genesco all announced negative results. AIG and Citigroup combined stock prices cost less than a Starbucks latte, even GE appeared to be struggling as auditors questioned the reserves of its financial division, and oil is going back up. Therefore it was no surprise that the Dow Jones Industrial Average hit a 12-year low.
According to a forecast by IHS Global Insight, US auto-sales dropped to the lowest annualised level in nearly 30 years with estimates that manufacturers will produce around 4 million cars in North America by the end of June 2009 which is down by more than 40% compared to 2008. The annualised rate is now projected at around 9.1 million cars, down from 16 million in 2007. The Wall Street Journal quoted information from Auto Data that dealers have nearly 3 million vehicles to sell as of the end of February; that’s enough to last 98 days without building another vehicle. At GM, the stock of unsold vehicles could last for nearly five months.
Based on the above, it was not surprising that reports continued to reflect negative trading conditions and hide prices adjusted to their lowest levels in recent history. Once again BRC shrank $1 per hide and closed at $6.50. HNS production, which at this time of year diminishes, also adjusted in the face of little-to-no automotive business and closed below $30. Branded steer selections all followed suit and traded down between $1 and $2 compared the week previous. No doubt overseas buyers will be looking to test packers, traders, dealers, and processors with $30 CFR bids and even though slaughter adjusts for the upcoming Easter holidays, there is a general consensus that we are continuing to produce more hides than the world can absorb.
Hide trade needs new rules
The solutions are not simple as we are dealing in a complex and diverse environment. Resuming the orderly flow of hides is of course paramount and from a US perspective, sellers will need to react quickly to competitive forces not at home but from alternative sources which are readily available. Demonstrating a clear and concise value proposition supported by consistent quality standards and most importantly, comprehensive customer service are basic fundamentals.
Installing buyer and seller confidence is going to be the biggest challenge especially in the face of the events that took place at the end of last year. We have entered a new era of hide trading, which will require a re-write of the rules of engagement. The basic principles under which our trade previously operated are no longer applicable and each market segment will need to independently assess its options and develop risk management tools that articulate in a clear and concise manner trading options and exposure. We have all the technological ingredients required to collate the information in a timely and beneficial manner. Now it just needs action.
But, and this is a big ‘but’, we do like the current market. Prices are workable for producing and making leather viable as a suitable substrate. Most tanners around the world have not seen US hides priced at these levels before.
The opportunity to use American steers, heifers, and cows at current price points can only be described as the sale of the century. Shoemakers around the globe are looking more closely at incorporating leather in their fall fashions. Bag and apparel manufacturers can benefit from leather’s natural allure and consumer preference. While it’s easy to remain on the bearish wagon destined to a bridge to nowhere, it is time to recognise that big packer selections priced in the low $30s are too cheap and represent incredible value opportunities. There seems to be limited downside risk in the current market, especially knowing from where the declines first started. To err on the side of buying is a sound strategy.
Share this story:
