Market Intelligence—11.08.09
11/08/2009
Listening to and reading the financial news, people are still being persuaded that the recession has ended. In the US and Europe, figures that have not worsened compared with the previous month are being celebrated as a great achievement and very few people are actually aware that the numbers are still far below those seen a year ago.
Everyone is reading the situation as it suits them and the vast majority are following the ‘positive thinking’ trend and assuming that positive news is an indication of a change for the better. Order intakes and production numbers in various countries are better and domestic sales in the US, along with unemployment figures, have been better than expected and this is feeding hopes for a return to growth.
None of this is bothering China very much, with growth there still at around 8%. The only worry is that all the money that has been poured into the country is being used more for speculative purposes than for the infrastructure projects it was destined for. The government is taking note of the situation and has announced it will investigate sharp rises in the stock market (+80% since January) and property prices (+25-30% since the beginning of the year). Although government projects have kept the Chinese economy on track and banks look sound from the outside, there are (valid) concerns that the loans may also have triggered new bubbles.
Stock markets continued to rise globally and commodity prices did the same, taking a short break towards the end of the last fortnight. Oil has now established a safe platform at around the $70 mark and the US$ continued to decline until last Friday when, for the first time in weeks, good economic data (unemployment figures) from the US supported the greenback, causing it to lose around two cents against the euro.
Despite the general optimism in Europe and the US, and hopes that the crisis is now finally over, there are still warnings about unemployment, negative budgets and general bankruptcies, which could still become a heavy burden for western economies before a real and substantial recovery takes place.
Market intelligence
With the holiday season now in full swing and the majority of people not bothering much about business, we could have copied the bulk of the last version of the Market Intelligence into this issue. The market fundamentals haven’t changed at all.
The last two weeks have been entirely a sellers’ market so long as better-quality hides are concerned. Everything that was put on offer found a taker even when prices where higher. In some cases, prices advanced by as much as 10% just in the past two weeks. Business has certainly become more sporadic and trade is arguing as to whether this is because of limited offers or the fact that buyers are not willing to follow anymore. As usual it is possibly a bit of both.
However, with more positive news from the general economy, many of those that had been opposing the recent price rises had to give in and a number of tanners accepted the few offers they were given to fill their production for the short term and for the weeks after the holidays.
The situation in China is similar; the few buyers around now are the ones who have not actively participated in the large-volume purchases so far and were ready to give in. In some cases, one has the feeling that these could be tanners who had not respected their contracts with some suppliers when the market came down and are now concerned that they would not get any offers or shipments if the market continues to rise.
There are already a number of rumours suggesting it is now payback time for shippers for whom contracts were not respected. In cases where shipments that were booked several weeks ago are still outstanding it remains to be seen whether these shippers will now behave as their clients are expecting them to. Reports suggest some sellers are overselling and shipping the more expensive contracts while asking customers who have bought cheaper ones to wait because production is insufficient.
Although this only involves a minority, it would be wise for the whole pipeline to find a way of identifying the troublemakers and to have the discipline not to allow them to continue their business. This way, this kind of problem can be reduced to a minimum as the volatile raw material market for hides and skins is already difficult enough.
Looking ahead
Since normal trading is pretty inactive at the moment and market activity is in holiday mode, we can use the time to analyse the current situation and to guess what this could mean for the leather pipeline now and for the rest of the year. It might still be a bit early for forecasts seeing as we are missing the real activity from retailers and consumers, but we can at least go over a couple of scenarios that might be helpful to one or the other in terms of how to behave in the present market environment.
It is pretty difficult to set a fair average value for hides and skins. However, in the long term one can actually draw a certain price range in which these kinds of raw materials seem to be fairly comfortable. Prices must take into account the value of the US$, which is still the basic leading currency for raw material commodities. Consequently, everyone in non-dollar regions has to work the currency influences out for themselves. Hide and skin prices were reported within reasonable price frames for a long time until the major crisis, which began in September 2008. At this point we saw jams in the supply pipeline, prices fall to historical low levels and raw materials piling up. One did not need to be a genius to know that prices had fallen by far too much and were miles below any reasonable valuation. Prices for hides and skins always fall steeply because raw material cannot be physically stored along the pipeline and money traditionally acts as a bottleneck. Added to this are massive losses, which are particularly hard for relatively small manufacturers to digest.
The Chinese influence
As a result, the question was not whether raw material for leather production was undervalued, but when demand would pick up and how strong the recovery would be. The biggest problem has been the strong influence of a rising star in the industry—China. It is not that we didn't know about its potential, but many really underestimated the impact its government programmes, which allowed many industries in China to invest serious amounts of money into all kinds of raw materials including hides and skins.
We are all still too heavily influenced by the good old days, when we mainly focused on the traditional leather producing markets. With the financial restrictions and sensitive attitudes regarding prices, one would not have expected the Italians, for example, to allow the hide market to rise by 60% or more in less than three months. For the Chinese, access to almost unlimited funds as well as having the option to buy premium-quality raw material at historically low levels was too tempting and they absorbed almost all the stranded stocks that had been piling up in suppliers’ warehouses. Since many of them bought at the beginning and paid very cheap prices for them, the price increases seem much less frightening than for those who missed the boat.
As we have said in previous issues, many smart buyers were able to build significant inventory at very low prices during the second quarter. For them it is quite attractive when raw material prices rise and it is also pretty easy to push the market with limited volume. For the latecomers, the situation is definitely less comfortable and hide producers will happily push the market up as well. The situation has become pretty complicated for those who did not take the necessary precautions. The market cannot turn around until reasonable stocks accumulate again and, for those selling leather in the meantime at low prices and failing to replenish their stocks, times will become pretty difficult soon.
Most of the volume buyers are located in Asia and very few European tanners were in a position, or had the courage, to take part in any of the aggressive replenishment operations we have seen in recent months. This puts them, on top of the disadvantages they have in terms of cost structures, in a pretty difficult position.
We all know that, in the end, price development is demand driven. We also know that the medium and high end of the raw material quality range is disposing of very few, if any, raw material stocks at producer level today. The key question is whether the goods have simply moved one or two steps ahead in the supply chain or whether they have already been turned into finished products against existing orders which will be shipped for retail pretty soon.
This is a difficult question, as the information we are getting is pretty conflicting. Luxury leathergoods have definitely seen sustained demand during the crisis and one can assume from this that the luxury, high end of the product line hasn't seen any significant reduction. It seems the product flow in this range has never really stopped and consumption has been pretty steady.
For leather bags and leathergoods in general, it seems that the increasing consumption in China has seriously compensated for the decline in demand we have seen in the rest of the world. Upholstery leathers have not been very attractive in Asia and have been seriously harmed in other markets. Automotive leather has seen a strong performance in China, but serious declines in all other major markets, and this is not compensated by the many government programmes that have boosted car sales, as they are not usually the types of cars that contain leather.
Leather demand is still not where it really should be and the fact that a recovery is not yet broad-based can be seen in the fact that lower-quality raw materials are still in abundant supply and prices for this type of material have not recovered in the same way as the higher end has.
The good and the bad
So, at the moment, only two options remain. The first is the optimistic view that there will be a continued recovery in the global economy and within the retail sector. As a result, better raw materials will continue to be in limited supply and may even continue their price rally. Demand will be strong enough to spill into commodity items and stocks that are still sitting around will slowly but surely be absorbed and prices will rise. This would be the perfect scenario and the recent drama in the leather pipeline would become a bad, but distant, memory.
The second option is a more pessimistic view based on the idea that a significant portion of the recent demand can be attributed to cheap money in China. The pessimists would also believe there will be further financial constraints in the European tanning industry and that those who are not suffering from financial problems will definitely suffer massive losses because of the sharp rise in raw material prices, which can never be passed on easily into the pipeline. Furthermore, the pessimistic view suggests that Chinese importers and traders are now disposing of sufficient stocks and that they are very competitive because of the cheap inventories. Further overseas purchasing and rising prices would be not attractive.
We will leave it to our readers to make their own decisions as to which scenario they would prefer and consider to be more likely. However, one thing is fairly certain; prices will not reach the low levels seen in the first quarter and the opportunities for building a strong raw material safety net will be fairly sparse. Those who have not taken their chances will have to plan and budget pretty carefully if they are to handle the coming season.
The splits market continues to perform well. Fashion in some sectors continues to favour suede and splits and this is helping the product despite the fact that, economically, it makes little sense. There are still many cheap hides around.
The skins market seems to have had a chance to benefit from the recent uptick in hide prices. Although the Russian and Chinese domestic markets are not showing much recovery yet, there are early signs from China that people are playing the same game as they are for hides. A number of skin types are still extremely cheap and those who believe in a general recovery in consumption and in the general economy cannot go wrong in replenishing cheap stocks.
Holiday season continues
In the coming weeks the European market will be almost nonexistent. Sellers don’t want to, or cannot, sell and buyers are on holiday and are not giving the impression that they will be using their mobile phones to search desperately for hides. This again leaves the market entirely in the hands of the Asian buyers and, if we look at the interest seen in recent weeks, the big players there have also been taking a break.
Small quantities will probably still find a home, but we are not expecting large volumes to be booked anymore. However, sellers, particularly the big packers, will take great care to ensure that the market holds its performance into September and they will put in a strong appearance in Shanghai and during their Asian trips.
Those who need to buy in the coming weeks will be confronted with higher prices and the option of taking it or leaving it. Sellers’ minds will only change when they have tested the limits without success a few times and when stocks rise again or forward positions start to erode. In Europe, sellers’ minds will only change when the kill starts to rebound in September or October and buyers will no longer be so desperate to absorb all the bulls that are around.
Payments could also quickly become an issue when tanners return from their holidays and could have an effect on the market. Buyers will not have an easy time in the weeks to come and only general trouble such as shipping delays will change the tone before mid September.
Share this story:
