Market Intelligence - 24.03.09
26/03/2009
Macroeconomics
The last two weeks have continued to prove the miserable state the global economy is still in. Large corporations still struggle to stand up against the wind and, in particular, industrial conglomerates are finding it hard to adjust to the present market realities. However, companies related to the basics of life—like chemicals, pharmaceuticals, food and telecoms—are still defending themselves better against the present drama.
Unemployment continues to rise and politicians are still discussing wether further stimulation packages would would boost consumer demand and the general situation. We think that further packages would be just a waste of money because private consumption is not really the problem these days; it’s much more about adjusting production capacities in some business areas where the management had no realistic access to the market potentials.
There is no need to discuss again the greed and errors of the financial institutions. It seems unbelievable that companies are still paying out bonuses these days, even if it is always with the excuse of legal commitments. Well, we would appreciate a bit more effort by companies to avoid these payments, made in many cases with taxpayers’ money. Whatever the contractual situation might be, it is also true that the management wouldn’t have got anything other than a legal claim if their companies had gone bust, to say nothing about the morals of the people claiming and taking these bonuses. In the history books, this period is going to leave deep marks and we can only hope, that the consequences will not result in the destabilisation of our societies. One can’t be happy about the intensified controls and regulations by the governments. What may look appropriate today could paralyze business in the future. Public officers and many politicians still justify their existence by state control and bureaucracy.
Currency concerns
Two weeks ago we thought that the euro would be in danger because of the threats presented by the difficulties some Eastern Bloc countries are experiencing, which have caused significant trouble to the EU currency. However, recent actions by the UK and US governments regarding their own currencies have given the euro a remarkable boost. It was able to climb by almost 7 % and broke through the level of $1.37 pretty easily in a sustained rise. There is a massive fear that this could create the ground for hyperinflation, with sharply increased money supply.
Stock markets were also able to regain a bit of ground from their previous losses and the oil price seems to have hit bottom at around the $40 mark, swinging back to almost $50 on the back of the weaker dollar.
It is pretty interesting to notice also the fact that there is more Chinese investment around the globe. Indeed the only economy at the moment that is still on a solid growth path is the one in mainland China. We can only hope that this development will not eventually turn out to be fake , because that really would be the final nail in the coffin.
Market Intelligence
In this time of crisis and, in particular, before the APLF leather exhibition in Hong Kong, there is actually very little to report other than what one can grasp from the few reports available from people travelling in Asia.
We have already displayed concern about the market situation, which is so different for the European supply origins compared to those from the US. With a firmer US dollar and a decent market correction, in combination with superior raw material, quality suppliers from the Old World have taken their chance and sold and supplied a lot of material into the Asian markets since beginning of 2009. In the meantime US suppliers have seemed unwilling to adjust their market prices and so quite a number of unsold hides have started to pile up in the New World. With a basically weak production quarter ahead of us, US suppliers have finally reduced their prices to become competitive again.
Since they have also been supported by the currency market and the falling value of the dollar, their main competitors in Europe quickly lost ground and control of the market shifted quickly back in favour of the US suppliers. The timing of this was pretty good and gave the first ones to travel to Asia a very good opportunity to glean rewards from these trips. Sales numbers from the US went up and market activity in Europe got a decent punch on the nose at the same time. Some of the European suppliers thought that the good start to 2009 would continue. From a number of origins throughout Europe we have heard that the good old games of competition at the abattoir door are back again and prices have gone up in the past weeks, which looks pretty silly today. This might please the butchers but it is definitely not a reflection of the present market situation.
Quality material
Talking to some of the key players, there are some who are trying to justify these developments by insisting there is good demand for better quality raw materials. We have discussed this issue already. There is no question that, with the low prices good quality hides have reached, and the small spread you see today between the different hide origins, there is a strong preference for better quality raw material. However, one should not ignore the fact that there is still a decent imbalance between the total offer of raw material and the demand for leather.
We still believe that better hides at a certain price will sell, and probably even be able to absorb productions, to get in balance with the reduced kill in spring. But we feel that it is definitely premature to believe that this can be converted into higher prices. With the abundant supply from other origins, existing raw material stocks and a fair number of desperate sellers, it needs a lot of optimism to believe that it is time for a market turnaround. We have only one market in the world that is operating at anything approaching a normal level. China seems to be the only production and consumption market that is not completely paralyzed by the results of the global crisis that began in September last year. We still need confirmation that the activity from China is going to be backed up by the consumption of finished products in the end. What is a little bit worrying is the fact that we hear from a lot of players in the market that sales are far less to their regular clients of the past and much more to unknown new names who are only operating as importers and traders bringing hides into China. These buyers have always been there in certain areas of China or Hong Kong. Today they are said to come from all over the place and even Chinese companies overseas are getting actively involved in this kind of import-export business.
This trend seems to prove that smaller operations in China that traditionally supply the domestic consumer market are trying to find their own ways to suppliers and are using the odd structures to import by themselves and avoid extra cost and sharing profits with third parties. At the same time, established sellers are complaining about very slow business with their regular big buyers who are normally strongly involved in the export business of consumer products into the US and Europe but who are still missing orders from their overseas clients. So far so good, but it leaves open the question if the demand in domestic China is strong enough to compensate for the reduction in export orders.
Our regular readers know that we do not belong to the totally depressed and pessimistic community of those who are monitoring the market. However, it would be too good to believe that the fragmented infrastructure of leather production in China can compensate with its domestic customer base for the decline in global retail.
Time for caution
Again we would to stress that we are still not entirely pessimistic about global demand in footwear, but the decline in automotive and furniture production will remain a factor for some time in 2009. The seriousness of the situation was also confirmed by the financial problems of Lear Corporation, one of the leading suppliers of automotive seating in the world, which has openly discussed the high risk of bankruptcy if its lenders don’t agree to restructure its liabilities.
Considering that the trader business into China has already offered frequent unpleasant surprises when the market did not turn out to be good as traders expected, and realising at the same time that in other parts of the world the leather industry is in a pretty poor state, a high level of prudence is advisable.
Let’s just think about the situation in which a number of these traders are not going to honour their contracts. At the same time some tanners in other parts of the world are no longer in a position to pay their bills, returning to a situation that we have already seen some months ago.
This market is not yet on safe ground and anyone who thinks it is already time for a turnaround should actually think first before they act. It is the old story that low raw material prices are tempting many raw material traders again and they fail to see the market realities. This is what we think at least and we will be the first ones to be positive again.
It would be wonderful if our concerns were proved wrong during the coming weeks, including at APLF in Hong Kong. That would confirm that global leather demand is over the worst and on the way back up again. We also think that it would be best for the market if prices for better raw material were to go up by 20–30% because this would allow the market to see a realistic difference between qualities again and allow also lower-quality raw material origins to receive a workable revenue for their producers.
Rebound for splits
The split market is showing a bit of a rebound. As a result of the high hide prices in the first half of 2008 some designers have used suede again in their collections. Nobody at that time expected that hide prices would fall by as much as they have, so it looks pretty stupid today to use splits in footwear production. Now we have the ridiculous situation the sharp decline of tanning in the last few months—in particular in Europe—has decreased the supply of splits by so much that some specific materials are not available in sufficient quantities at the moment. Collagen splits, fine fibre splits and extra heavy ones are in short supply and their prices have been able to recover a bit. It seems also that some of the vast stocks that have been sitting in some origins have been reduced, so, with a sharply declined production, some pressure has faded from the split market. However, it hasn’t resolved the fact that splits today are too expensive compared to grains, and with the continuing surplus of hides, we cannot expect a sustained better future for splits.
Skins in demand
The skin market is also moving sideways at best. There seems to be a shortage of fine wool skins as a number of origins are reporting strong inquiry for this kind of material. As we know, there are only a few origins that can actually supply these fine wool skins, which are particularly in demand for linings and some garment production. However the general demand for skins, in particular for nappa production, is still insufficient. With a sharp decline of prices for small calf we also have to expect increasing difficulties for goat skins and some hairsheep types.
Since the wool market is not in a particularly good shape either at the moment, fellmongering is not a great pleasure these days. We can only hope that orders for skins are being delayed rather than cancelled and the situation will improve in the weeks to come.
For the coming weeks we can see few reasons why the general environment should change. Tanners have still not realised that raw material is going to be their main headache soon. The second quarter is traditionally pretty tricky for the raw material market. We still have hope that a number of leather orders are stuck in the hands of some brand names and retailers. If these companies do not place these orders, we could enter another difficult time after Hong Kong because hides and skins continue to need regular clearance and there are still reasonable inventories waiting for buyers as well. The reduction in global kill will only have a serious effect when present stocks are cleared.
So we hope for change, but believe it is more than advisable to watch carefully for the traps and risks the present situation still has to offer everyone.
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