The Jacobsen Commentary and Market Opinion

Courtesy of www.thejacobsen.com

A fair amount of processor trades were reported on Monday with down-to-mixed prices mostly from weekend business. There were no big packer trades reported.

Business was quiet on Tuesday as traders attempted to gauge the market’s pulse. Most suppliers are well sold on steer/heifers for the moment and are working to move select odds and ends. CBS, BC and bulls were moving with difficulty and, as reported the previous week, their supply was more than ample to cover the pace of orders. The limited trades reported for the day were all up with light HNS ranging from $46 to $50, BS at $42 and heavy CBS at $33.

A fair number of trades was reported on Wednesday—most of which were up money. Steer prices, with the exception of CBS, appeared to be bunching closer together with most falling between $44 to $48.

Thursday’s trading volume was notably down for a Thursday, a day of the week when business tends to be brisk. Prices continued to increase with most reports up from previous levels. Most folks were quite bullish, noting that many unsolicited bids were coming in up from the previous week’s trading level.

Trading volume was up on Friday with reports continuing to force prices higher and rounding most of the steer selections into a fairly tight pattern.

Bullish bandwagon

Jacobsen Price Index hide prices raised $3 last week following the same pattern as the previous week’s steep increases, when the Jacobsen Price Index climbed $4.

Tanners are concerned that these steep increases sweeping across the industry are too great and too quick for them to absorb with leather sales. Although some traders are convinced that leather prices never dropped to the levels that the hides did this spring, many are concerned that the market is rising too quickly and will soon correct it. If this occurs, the rollercoaster ride will not be good for anyone. In general, the mood of traders ranges from euphoria to worry with one group thinking the market will reach the $60s C&F (cost and freight) into China, while others worry that it will collapse onto itself.

With buyers knocking on the door bidding up money and kills continuing to be low, it’s hard not to jump on the bullish bandwagon. Last week’s kills were estimated to be 639,000, up from the prior week’s 615,000, but down from the same period last year at 662,000. Year-on-year slaughter was behind 1,035,000, roughly 5.1%.

One factor playing a role in the market’s direction is the current shipments of cheaper hides from older sales. In many cases these hides are leveraged and tied to new high-priced orders moving the market upward. Many pundits think this, and the current lower kills in the US and abroad, are the dominant source of the market rally outweighing the subdued demand for leathergoods.

The effects of packers and traders pulling in their forward positions were strongly evident. Adding to this backdrop were suppliers shipping hides that are much cheaper than the current market and low kills. This gives us a picture of the supply side of the hide market. On the buyer end, some frustration was evident, particularly with those who did not see much improvement in leather demand.

Making sense of it all

What does this all mean? Will the market finally pause to determine a direction or will it continue to climb until it cannot sustain itself? Although most of us have missed the mark on the strength of the market rally, if we put into perspective where the market is now compared to a year ago, this massive increase can be viewed more as a correction with prices still down 25-30%. Steers at $45-$50 are still at historic bargain levels and should be desirable for anyone anticipating the market returning to more traditional levels in the near future.

This said, many are now thinking that the market is beginning to rest for a while as it settles into a trading range between $45 and $55. In spite of the green shoots with some segments of the economy showing improvement such as housing and the domestic Chinese markets, we are still in a major recession with leather business not close to where it was a year ago. Even with the global hide supply down, it will take some time before leather demand completely catches to supply. At current reduced levels, that point has not been reached.

With sellers pulling their sales in closer and low slaughter numbers, many do not have material available to sell. One source reported that, because of this, they sold almost nothing the previous week making it one of the slowest ever.

The international market

UK

It was a slightly quieter week than the previous week with supply remaining scarce and prices practically unchanged. Tanners were complaining that the prices of hides were too expensive to fit with the leather orders that they had.

However, tanners have been saying this for the past two months and yet demand is still out-stripping supply. It may be a case that prices have increased too much too soon and it takes a while to adjust to this. We do not envisage any easing; however, prices may now level out for a short period with the kill levels dictating which direction to go thereafter.

China

There were not many offers from sellers this week and most Chinese tanners were not buying hides but pushing for shipments on existing orders. Price increases continued, however, with offers for HTS in around $58 C&F, $3 higher than in the prior week. No sales were confirmed at these levels but the rumour is a $57 purchase for HTS did occur.

The shipment delays continued to be a problem and were becoming normal everywhere—and in some cases it was getting worse. This resulted in some tanners becoming desperate and willing to pay higher prices or attempting to buy from other sources including other tanneries and trade companies.

Leather business in the local markets remains strong, outperforming export sectors. Most tanners remain cautious since they don’t have a clear picture for the future. Export side leather business was not particularly good with sources indicating that brand orders were still behind projections. Tanners in this sector most probably are not driving the hide market upward since their purchase commitments for hides are based on these forecasts.

Although some tanners are caught in a position where they need to continue paying the asking price for hides, many are not and will resist. Buying at these levels will likely be limited. With prices no longer in the $20-$30 range, fewer and fewer people will be willing to risk any speculative buying.

Richina Industries announced plans to build a wet blue facility in Liaoning province, China. The plant, slated to be built in Fuxin, will be operational in late 2010 and will produce wet blue to supply its wet blue operations in Shanghai.

Australia

With the Italian holiday now a factor, business to Italy was off but export markets were still very active in other parts of the world. Asia in particular has resumed interest in hides, especially for lower grades and blue drop splits. The A$ was trading at $0.83 which was way above traders’ liking, but demand for hides was helping to compensate and easing the pain.

Some expressed reservations about sustainability of the present market climate in the long run. Demand from upholstery tanners in both the furniture and auto sectors became rather lethargic and, with prices rising so fast, many think a major correction is not too far away.

Kill numbers followed winter trends with numbers low in the south but above average in Australia’s north. As a result, there was little offered out of Southern Australia this week, and what was offered was at higher prices.

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