What happened this week: The only people that are happy at the moment are the butchers who have been able to obtain an unexpected jump in the value of their main by-product. Although hides are still at levels that are below the long-term averages, the rise has been too quick and has gone too far to be swallowed by the market.

The fundamentals are also missing. We are in the middle of the summer and, except for the general hype in the financial markets and the strong performance of the Asian economies, there is still very little to actually confirm the full recovery of the global economy. There has never been any question that the raw material markets were reacting to sharp declines at the end of last year and that producers’ stocks had been run too low. However, the leather business does not appreciate such steep rises either. The volatility seen in recent years has been far more significant than during similar situations after 1997/98 or during and after the BSE shock in 2001.

The hide market, like any other market, needs periods of settlements to allow the pipeline to adjust accordingly. However, this time no settlement period was granted. Too much easy money was available to tanners in China and the much better performance of the markets out there has given tanners the courage to invest.

However, what is possible in Asia is hardly transferable to other leather producing regions. Particularly in Europe, the steep rise in prices will cause a number of problems. The most obvious one, of course, is the profitability of tanners, but what could be even more detrimental is the cash-flow situation. While in China access to credit is easy, European banks are more reluctant than ever to offer companies loans. Last but not least, credit insurance companies are still reducing the cover for many companies in the leather field and, with the recent and steep rise in prices, the limits are simply not fulfilling many suppliers’ needs.

So the market is still being driven by the current momentum and particularly by the temporary shortage of heavy, good-quality hides that had been built over the summer. The automotive supply chain is as much to blame for the bonanza we have seen at the abattoirs in August as it was for the steep fall in prices for these premium selections. There is a need for a bit more rational thought in order to avoid this kind of volatility, which is of no benefit to anyone.

The Asian business has seen a real break for the first time in months. With the sharp rise in our asking prices and the weaker US$, the limits have really been tested. Chinese tanners did not see any particular reason to follow the market at the present level, which is not particularly surprising considering their adequate (cheap) stock position and the fact that the US market had taken a break. However, nothing is certain at the moment as nobody desperately needs to take action before ACLE, which kicks off in about ten days.

Everyone will be looking for final impressions about market trends during their trips overseas before positioning for the rest of the year. The financial markets are drawing a very positive picture for the future and, providing this is true, hides are still not particularly expensive. If the great expectations turn out to be false, we could quickly fall back into dire straits in October. 

The kill: The kill is still on the low side, but is starting to moderately improve. The school holidays are ending in our region and the kill will now moderately normalise. Weights are still low.

What we expect: Next week will be the last one before the end of the summer break. It is also the week before the Shanghai fair. The present price levels reached will need confirmation from the market and it might take at least another two weeks before the market has really sorted itself out. Except for heavy material it is unlikely we will have any clear indications about the market trend before the fair in China.

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