US Perspective—07.04.09
The Jacobsen Commentary and Market Opinion—07.04.09 Bad start to the week
Courtesy of www.thejacobsen.com
After a couple of weeks of positive economic news and a 20% rally on Wall Street, the wheels seemed to have come off following a tough report from the US government on the auto bailout. The administration indicated on March 30 that the restructuring plans from GM and Chrysler were insufficient and in addition, they “requested” that GM’s president resign. On the up side, they did not recall the $17 billion of loans received thus far as had been originally intimated and will give Chrysler and GM more time to develop an acceptable business plan.
Rick Wagoner, GM’s president, has agreed to step down and will be replaced by Fritz Henderson, the company’s vice chairman and chief operating officer. Equities markets have not reacted favourably with all major indices down on March 30. The DJIA was off 3.27%, down 254 points.
Although Monday is usually slow, trading activity was especially slow on March 30 with many from the industry away attending the APLF. Branded cows dropped to $6.50, giving up its price gains from the previous week. Prices on all other trades on March 30 were within the prior week’s range.
Mixed reports
BS and CBS continued to be plentiful, dragging on the market, although one source reported acquiring $2 up on a branded steer sale. On the other hand, BBS, HTS, and HNS had a stronger and more balanced position of supply and orders. Packer HNS were sold on March 31 for $27 and $28 FOB. Few other trades for that day were reported.
The second quarter began on solid footing on April 1 with a gain of 153 points on the DJIA followed by a 216 point rise on April 2, extending a four-week rally. More positive news can be evidenced by a rebound in pending home sales and an uptick in manufacturing. According to The Institute for Supply Management, the manufacturing index in March rose to 36.3 from 35.8 in February.
This general economy tone changed from all negative news to a sprinkling of positive stories plus a sense that a turnaround may be forthcoming is beginning to take root in the hide and leather industry.
The USDA US sales and exports for the week ending March 26 helps support this positive momentum with combined sales for hides and wet blue at 990,900, up for the third week in a row. Of interest is the large number of unsplit wet blue sales of 328,900 with over 50%—165,000 pieces—destined for Italy. Combined exports at 678,000 were closer but still 13% over that week’s slaughter which was 600,000. Sales were 65% over slaughter.
Trades on April 2 were stronger with BBS, HTS, and HNS averaging $28.25 and Branded Heifers $18. Prices for cows ranged from a high of $18.50 for HNDC to $8 for NBC.
Industry overview
There has been a great amount of time and energy spent throughout our industry in an attempt to understand the impact of inventory overhang in the US and its subsequent influence on the recent price crash on hides. Focusing on slaughter and shipments, export numbers for the last half of 2008 and the first 12 weeks of 2009 are considerably less than slaughter during that period. They were also lower than the first half of 2008.
In 2008, shipments during the latter part of the first quarter and early part of the second (the traditional shoe season) were particularly good. As the year proceeded into the third and fourth quarters, shipments declined resulting in more than 1,350,400 hides produced than shipped. In the first 12 weeks of 2009, this trend continued adding approximately 500,000, for a total of 1,849,100 more cattle slaughtered than hides and wet blue exported.
In order to understand the impact of this on inventory, we must take into consideration the domestic finished leather production which, in the past year due to outsourcing, consolidation, and the recent economic meltdown, has been a moving target. If we estimate 30,000 hides per week for the third quarter and 20,000 thereafter, that would make domestic production 390,000 for quarter three; 260,000 for quarter four; and 240,000 for the first 12 weeks of this year, totalling 890,000 hides. This reduces the hides in excess of shipments for the second half of 2008 and the first 12 weeks of 2009 to around 960,000 hides.
In terms of US annual hide production, this inventory build-up represents only a small fraction (3.2%) and cannot by itself be the driver of the market meltdown, and the unprecedented cheap hide prices. This is only a drop in the bucket of the US supply and is insignificant in terms of the world supply. For the hide market to have given up over 50% of its value, the key pieces to the puzzle reside in the global hide position and overall demand.
In conclusion, prices were firm with a small increase overall but trading fell within its normal range of the last couple weeks. As of Thursday, BBS, HTS, and HNS were up $0.50, averaging $28. The trading ranged primarily from $26 to $29, but one trade reported in the low $30s. Most in the industry maintain that CBS and BS were under pressure selling for $22-$23; however, a few trades were reported at $26+. Heifers were a little stronger with brands trading up a $1 and natives $1.75, ending at $18 and $19 respectively on average.
The week’s trading ended quietly with only one trade reported on branded steers for $21. Slaughter reported for the week is estimated to be 606,000 cattle, 25,000 more than last week and 20,000 less than the same period last year.
Special APLF report
In 1984, the Hong Kong Leather Fair was established and quickly became an important venue for the global hide and leather industry. To those of us who were part of the first exhibition, housed in a converted parking garage, congratulations on attending the 25th version. This event has grown beyond our initial ideas and is today a far cry from the discomfort we all endured with leaky roofs and inconsistent air conditioning. We also must applaud the successors to this first event, APLF, in creating a first-rate forum to showcase the leather industry in a wonderful setting that continues to attract visitors from around the world.
The hide and leather world has radically changed over the past 25 years and while there remain several individuals who continuously journey to these events, some of the companies and associated players who helped make the APLF successful are no longer with us today.
It is worthwhile detailing some of the changes that have taken place over the past 25 years in the US hide industry. While beef slaughter and hide production has declined 9%, the total amount of beef produced increased 13%, caused by the average weight of live cattle increasing 20%, from 1,067 lbs per head in 1984 to 1,282 lbs in 2008. This clearly explains why hide weights have increased these past 25 years. During this same period, there was a noticeable shift in production where Nebraska today is the largest producing state in the country compared to 25 years ago when Texas occupied the number one position.
It is also interesting to note that, according to the advertisement that appeared on virtually every issue of The Jacobsen, “three out of four US hides are tied with Redi Rope”. It is hard to imagine that 25 years ago we were packaging hides individually tied in neat bundles and then physically loading them into containers virtually one at a time. While we have come a long way in hide packaging, the same cannot be said for the commercial methods and practices.
Some hopeful signs
Meanwhile, back at the first day of the APLF (March 31), it was obvious to most that a cloud of doubt and concern was hovering over the convention centre and it was not a reflection of mediocre weather conditions but more the reality that all attendees are facing in terms of business and the surrounding dubious economic conditions. The general perception was that attendance was better than expected and that some tanners had waited until now before buying hides.
Business was heard to have taken place on HTS and CBS on March 31 at steady to slightly higher compared to last week’s sales in addition to trades on branded and native cow hides. Comments from the APLF press conference reflected an industry still lacking the active involvement of the automotive and upholstery leather tanners and that the outlook for the next 18 to 24 months will be challenging as the world manages its way through the current economic turmoil.
On day two of the fair, the volume of traffic through the fair clearly increased, resulting in the narrow hallways becoming crammed at certain popular intersections. With the exhibitors condensed into one primary hall and other locations occupied by either finished products or synthetics, the fair’s organisers created an exhibition that did not appear to be consistent with the original premise of an Asia Pacific Leather Fair.
Interest and activity both improved as reports from representatives of the major producing regions were all pleased at having booked some business. While no one was willing to declare the market had fully turned and the gloom and doom scenarios were history, there was sufficient evidence and confidence expressed to indicate that prices are firmer with even branded steers resting in strong hands.
There is little debate that no records were set during this year’s APLF, but for the hide suppliers who braved the storm, the event turned out far better than expected. The business of buying and selling hides was very much back in fashion and, while the grey skies and ominous clouds remain stalled over this section of the Pacific, the industry was trying its best to find solutions to their differences of opinion and move forward. There were two clear reasons to be optimistic: 1) Signs that shoe business was improving and that several major companies who previously had not placed orders were now beginning to signal that orders are being distributed: and 2) The residential upholstery business was also starting to pick up as the large Asian manufacturers were slowly increasing production.
Admittedly, compared to previous fairs the environment was different and evident of a global economic downturn. In years past we have been impressed by various European presentations, showcasing leather and promoting their respective industry’s skills. However, today these grandiose spectacles have disappeared commensurate with the demise of European tanning industry. The most notable exception being this year’s promotion by Turkey and their novel use of leather-clad purple fairies, complete with feathered wings, who welcomed visitors during the first two days of the show. A great use of leather, and definitely something memorable.
Conferences and meetings
Reports from the ICHSLTA press conference held on the morning of April 1 were nebulous. It would appear that the limited attendance and possible lack of enthusiasm was ignored by the organisers as they proudly announced improvements in the International Contract #6. The irony being that this document has lost its recognition and in turn respect in the very market this announcement was being made. It is also interesting to note that the international contract is not supported or recognised by the USHSLA and various other hide associations and that no involvement was requested by the largest shippers in the world to either change this detail or help assist in revising this document.
Later in the day, a meeting was held between the USHSLA and the CLIA together with board members of both associations and some leading Chinese tanning operators. The initiative to engage in discussion to address the recent contract performance issues is to be commended. Addressing the integrity of a contract is something that is not normally required, but is an issue that occupies the hearts and minds of most hide sellers. It was noteworthy that some of the tannery offenders were present at the meeting and basically underscored the challenge that we all face in bringing back law and order to an industry that seemingly is now lawless.
The notable session on the morning of April 2 was the APLF-Sauer meeting titled ‘The Hide Market Crash and its Influence on the Future of the Leather Industry’ which was extremely well attended with presentations made by the following people: John Reddington, president USHSLA, ‘View from the United States and what happened to the China-US hide market relationship’; Luis Bittencourt, president, and Wolfgang Goerlich, director, of the CICB (Centre of the Brazilian Leather Industry) ‘View from Brazil’; Dr Zackria Sait, chairman of the Indian Finished Leather Manufacturers Association, ‘View from India’; Joel Lecroq, sales and marketing director K-Star footwear, ‘Consumer demand and the possibilities for Chinese shoe manufacturers in 2009’; Madame Zhang Shuhua, chairman of the China Leather Industry Association, ‘View from China’; Paul Pearson, secretary International Council of Tanners; and David Peters, DLP Advisors, ‘Solutions for risk management in the global hide business and how to avoid toxic contracts’.
This was the first time in a public forum that the major hide exporting countries were able to voice their frustration and comment on the events during the end of 2008 and early 2009. In response, Madam Zhang was able to provide her association’s side of the issue together with general comments for the future. Without going into the specifics, the meeting raised numerous concerns and counter points, but like all matters of contention, there are two sides to every story, especially when debating who fired the first shot. The bottom line was that the meeting provided a forum for industry to basically vent which was a good idea and hopefully something positive will emerge.
At this meeting, The Jacobsen presented a solution to address the current challenges, The Jacobsen Contract Rating System. The need to improve how hides are traded is obvious, in addition to providing trustworthy tools to buyers and sellers alike that allow decisions to be made with credible information.
Providing performance tools that simply and succinctly indicate the integrity of the anticipated contract would be valuable for each side of the deal. Having access in a real-time environment to contract metrics is something long overdue. As a new segment under The Jacobsen umbrella, this new tool would be able to provide both buyers and sellers with an independent, unbiased, and factual evaluation of a specific company’s contractual performance.
Using algorithms based on existing data together with supplemental information provided by each company, in addition to country and bank risk, The Jacobsen would be able to provide subscribers to this new service with an online rating system. It should be able to aggregate global activity and provide subscribers with an accurate picture of trading conditions.
