Macroeconomics

During the past two weeks, analysts’ views have changed a bit. Various publications are saying that the financial crisis has already tipped the balance of economic power further in favour of the East.

Despite all the positive news about better order books and industrial production in many of the old economies, we have only really seen an end to the descent so far. Even if economies are not shrinking anymore their recovery is far from being strong enough to offset the declines we saw during the last four quarters.

By contrast, statistics show that Asian economies, led by China, are continuing to grow at a rapid pace. China, Thailand, Taiwan, Indonesia, Vietnam and many others may not have achieved the wealth of the US or European economy yet, but growth in consumer spending in these countries is easily compensating for the decline in demand from the US.

Although many are complaining that the statistical data delivered from these countries might be questionable in many cases, we still have to assume it is accurate. We can easily see that people are continuing to shop in these nations and that the general mood on the streets is much better than in the old world. 

Here in Europe and across the Atlantic we are still having to deal with many consequences of the recent recession. We have seen better results in terms of industrial production, and some polls suggest corporations are reasonably optimistic about the future. However, this cannot compensate for the massive threats from the huge national budget deficits and from rising unemployment, another knock-on effect of the crisis, which started at the end of 2008.

Nevertheless, the good news is that the Asian economies are currently doing significantly better than the European and US economies. We have to ask ourselves whether this is simply a temporary thing, and whether the massive offer of liquidity from the Chinese government could eventually lead to another huge asset bubble.

Rising stock markets and the huge impact caused by the Chinese buying raw materials could pose another big risk for the global economy. If the growth is not sustainable and the success of the Asian economies does not continue to turn into orders for machinery and other products from the US, Europe and Japan, there is a serious risk that the whole rebound could turn into a dead end and implode.

Although this scenario does not seem particularly likely, we are still waiting to see whether improved conditions in Asia spill over into the rest of the world. The quick recovery of the Asian economies after the crisis in the late 1990s could work as a positive example for the present situation and, with the increase in economic power and the sheer size of Asia’s consumer markets, they could indeed become the new driver for the global economy.

From the statistical data supplied it seems that, for the moment, the steep decline has stopped. Most numbers relating to production and GDP are indicating fairly modest growth, so the decline has come to a stop for the time being and is laying a more positive floor for the rest of 2009.

The US$ continued to trade in a very narrow band between 1.41 and 1.435. Commodity prices continue to climb, still primarily driven by strong demand from Chinese, but one has to assume that companies in other countries also need to replenish their inventories.

Fortunately for consumer spending and unfortunately for the farmers, most harvests in the Northern hemisphere are looking pretty good and this is holding food prices pretty much under control if not at fairly low levels. This continues to keep inflation under control and interest rates do not look like they will be on their way up in the very near future. So, for the time being, only energy prices could become an additional threat to family budgets for the rest of the year.

Market intelligence

The holiday season is slowly coming to an end. People in Europe are returning to their desks week by week and the last of these will return during the next week. The last two weeks have been pretty quiet with most people still enjoying their holidays.

Many are already packing their bags for trips to Asia, and the majority will attend the All China Leather Exhibition (ACLE) in Shanghai (September 2-4). Expectations are running high as usual; however, for different reasons this year. After the sharp rebound of the raw material market, most exhibitors and visitors are extremely curious to find out whether this will be reflected in terms of interest from manufacturers and retailers. There are several consumer product tradeshows in September including shoe fairs and furniture exhibitions in Europe and, by the end of the month, we should have an opinion about how strong and how quick the product flow throughout the leather pipeline is going to be.

Until then, all eyes will be focused on the situation in Asia where, traditionally, a lot of purchasing activity comes from American and European companies who are travelling and discussing their order expectations for the rest of the year. A lot will depend on how empty their stocks are and whether they might still need some quick shipments to get product on the shelves for the Christmas shopping season. Time is definitely getting very tight, but no product definitely means no business, and if retailers are taking on board the general optimism they might still have needs and be willing to go round factories in China to find out what kind of material can still be shipped in the next four to six weeks.

Shipping problems

This leads us to another issue that has become one of the top summer topics: shipping facilities. A lot of companies are not only finding it increasingly difficult to get shipping space, but are also complaining about rising shipping rates. Responding to the crisis, global freight rates fell sharply during the first quarter of 2009 and a lot of shipping companies have been losing big money every month.

In response to this, they have taken a lot of ships out of operation and freight space availability on the key routes between Europe/Asia and the US/Asia has been significantly reduced. With a rebound in trading, shipping lines are not currently offering any more departures, but are trying to increase their freight rates before they offer more space. This is easy to understand and for some it may be that recent activity needs to be confirmed before they resume business as normal and put more ships back in service.

Price hikes

As far as hide and skin trading was concerned in the last two weeks, people that have been left behind and sharp price gains have been the focus once again. Those who have been in the business for a long time continue to worry about the situation and are saying it is not the price levels that are worrying, but the speed of the rise. In US$ terms, prices for premium hides have gained anywhere between 50% and 75% since March, particularly in Europe where the biggest jump has taken place over the past four weeks. This has come right at the wrong time as the market is in low gear because of the holidays in the western world.

Anyway, these developments, which we have been seeing for some time, simply had the consequences one had to expect. Sellers, and particularly the slaughterhouses, started to become greedy. With concerns about the general economy diminishing, and with rising stock markets and other commodity prices also rebounding, packers in Europe and the US gained more control of the market again and were willing to test the limits. Prices were shooting up, particularly in continental Europe, by roughly 25%-30% from the levels we saw in July to the August levels at the abattoir door.

In terms of the hides that are normally being sold in the Far East these days, buyers have started to dig their heels in and were, for the first time in a long while, unwilling to honour higher prices with reasonable bids. This is not really surprising seeing as they have bought enough now to take a break. In addition, they are now able to wait for suppliers to come and discuss the market situation face-to-face and to find out how strong the sellers’ positions really are. It would not be the first year that Asian buyers had been very active during the summer and then fell far short of expectations in the time between September and November.

Automotive industry struggles

The situation is far more complicated for European tanners. Automotive leather producers seem to be in a pretty delicate position. Since the automotive industry is building its supply chain much more on budgets rather than anticipation, it seems that budgets for the rest of the year are higher than before and this has triggered a move within the supply chain from ‘reduce stocks’ to ’replenish stocks’.

This came exactly at the wrong time with the kill for heavy, top-quality material at its lowest phase of the year. With many automotive producers having missed opportunities earlier in the year and leaving a lot of the hides to new buyers from overseas, they quickly had to realise that they either had to tell their buyers they would not be able to replenish the pipeline as quickly as they would like or that they would have to pay what was asked for what was still available.

This has pushed higher prices back again. In the long run, hide prices are still not in any dangerous territory, but many European tanners will now deeply regret some of the leather contracts and prices they accepted in the first half of the year to secure production as they will now need to replenish raw material inventories at substantially higher prices. While most Asian tanners have built stocks, many European tanners are now stepping into the market to buy hides that are far too expensive. While some are definitely financially strong enough to handle this, quite a number could be running into serious financial problems. With the low production and turnover in July and August we are now entering a critical phase.

Excitement levels down

The splits market remained pretty much in holiday mode during the last fortnight. None of the excitement we have seen in the hide market has been reflected in the splits business over the summer. This means very little and we will see more from this market in Shanghai and in the following weeks, when more information about shoe and leather fashion trends will be reported from the trade shows.

The skins market was not very exciting either. There were some deals for double face lambs reported and some players are saying they saw more interest from Turkey than they would have expected. However, we couldn't trace any volume trading and so it all came down to some coincidental trading. Goats are still enjoying reasonable demand and China, in particular, is trying to secure more and better quality suppliers, particularly from Africa.

In the coming week it is pretty unlikely that international trade will be particularly exiting. Some sellers will already be in Asia visiting their clients. It is unlikely they will be ready and willing to report much before the fair, so all we can rely on is rumours. The showdown will come the week after when the global trade meets and sellers will have to check whether the demand and business seen in recent months has been based on speculation, replenishment or on actual higher demand from retail and from the pipeline. We will keep you updated.

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