Market Intelligence—08.09.09
08/09/2009
Macroeconomics
We will keep this section short this time. Financial analysts see more and more signs to make them believe that the recession is behind us. Sentiments are rising. Production declines are slowing down, and so on. The crisis could be behind us and better times may lie ahead.
Well, for long-term economical statistics this might be even true, but what worries us is still the uncertainties of the labour markets. US unemployment rose to a 26-year high last week. In Europe unemployment is still covered up by a number of various government stimulus packages, but many expect numbers to climb into the last quarter and well into 2010. The labour market is always late in the cycles, but it is also important when and how strongly the labour markets can recover. They play the key role for private consumption and are also a strong psychological factor. So, again we don’t want to be the great pessimists, but it could still be quite a while before the normal person in the street can feel what the economists are pointing to today.
Meanwhile the financial markets are still moderately positive. Stock markets on average continued to gain. Even seeing Shanghai stocks falling last Monday by a whopping 6.7 % did not last long with the Chinese government quickly spreading further optimism and supporting the market so that a great deal of the decline was quickly recovered.
However, as good as things seem to be in China—and the trip to the Shanghai leather show for many in the industry last week confirmed this—many are still worried about possible bubbles created in the country. Nobody really knows if all the money which had been pumped into the markets has really ended up where it was supposed to go. In the meantime, and to prevent bubbles, the Chinese government has cut capital injections and loans in the last month already. The way it was communicated to the public made it clear that Chinese leaders share these concerns.
The oil price slid to almost $65 per barrel, demonstrating that some of the speculators are cashing in, and reflecting reasonable inventories in the major consuming markets. Gold rose to almost $1,000 per ounce, which demonstrates that many are looking for a safe haven. It may also be that some are still worrying about a strong return of inflation.
The European Central Bank decided to keep interest rate low and steady, and the comments made by the bank’s president, Jean-Claude Trichet, did little to give the impression that the ECB leaders are convinced that everything is on safe ground. The indications are that interest rates will still stay low until mid-2010 to ensure that the economy is not derailed again by an early rise in interest rates.
The US dollar is bouncing up and down in small ranges. However, with the end of the summer, it is quite sure that new directions will be taken soon and sharper moves have to be expected. For the moment it seems that the dollar bulls and bears are paralysing each other, but this will certainly not last for much longer. So, anyone who depends on currency hedging should be on rising alert about the situation in the currency market.
Market intelligence
The industry gathered in Shanghai last week and everybody was excited to find out after the holidays how clients and the markets would react to the absurd price increases seen in the raw materials market during the summer.
So, almost everybody went and couldn’t resist the chance to form a personal impression about the situation in Asia and China and to meet friends and colleges from all over the world. Consequently the attendance was pretty good and not only from the domestic Chinese visitors, but also from overseas visitors. In the hall of the overseas tanneries and raw material suppliers it was pretty impressive to see a lot of new exhibitors who had not bothered to have a stand in the past.
Raw materials supply
This is, at least for Europeans, not a big surprise as many suppliers were still focusing on their European customer base. Those who supply fresh hides to tanneries around Europe in particular felt forced to check on the overseas markets. With European hides having become so popular during the period of low prices in the first half of 2009, Chinese tanners were pretty happy to see more potential suppliers and were actively sniffing around to see if more stands could also offer more good hides at low prices and to see if they could find still the undiscovered treasures around.
Well, they will have been disappointed. There is nothing cheap left in Europe, at least if quality is required, and all the new beauties tried to show their attractions and to explain why they should be taken for the night out instead any of the old buddies.
Being a bit more serious, it was really impressive to see how many European raw materials stands there were scattered around. This was evident as they are pretty much all on their own and most of the other nations are pretty much concentrated in their country pavilions.
As already mentioned we were impressed by the number of visitors and from the first day in the morning until the end of the show one could see intense discussions almost on every stand. Even on the last day when, as usual, the aisles were not so crowed any more, the quality of visitor seemed still to be pretty high, even at three o’clock in the afternoon with the official closing many were still busy trying to finalise what they obviously still had to discuss with their clients or visitors.
Speaking to the overseas visitors and exhibitors most of them had the same positive impression we had. Those coming from Europe and the US felt relief to come to a place where the crisis is much less evident than in their countries. Whether that is actually backed up by the real fundamentals doesn’t really matter, it is already enough that the sentiment is there.
China’s leather industry
How about the leather business and was the show able to confirm the justification of the large imports of raw hides China made in 2009 so far? Well, what struck us in the first instance was the fact that officials reported that the country had imported 11% more hides so far in 2009 than in the same period in 2008. One may not be too impressed by the value of Chinese statistics, but the trend will definitely be right.
One can’t actually say, that the leather business would justify such a high need of raw materials and so one has to believe there are still a big number of the hides in inventory. Talking to a number of well informed Chinese sources, they are seeing these stocks in the hands of traders in particular, and in wet blue productions and even more in the tanneries producing low selections. Quite a few were mentioning large stocks of medium and lower selections, which were left over from the tanning of higher quality hides.
Although the Chinese domestic leather business is regard by everyone as good or even very good, a deeper analysis of the situation demonstrated quickly that this it is only true for a part of the total production. There is no doubt that Chinese women are still shopping for handbags and are pleased to get better quality today than ever before. The shoe business remains pretty stable, according to the sources, due to government programmes to stabilise the economy and boost consumption. Domestic car sales were also good with a high penetration of leather. However, this can still not compensate for the lack of export business which is conservatively estimated to be down by 20% over all.
Statistics suggest China’s domestic private consumption today is still only about 10-15 % of that of the USA. This might give an indication that all the good news from China can still not compensate for the uncertainties and reductions in the rest of the world.
Financial drama
Consequently, despite the positive impressions, many were still concerned about how sustainable the present market situation can be. As we analysed earlier this year the situation was definitely never as bad as the market suggested in the first quarter of 2009, but there is a fair chance that we have only seen something like a sharp swing back as a result of stocks that had been run too low for some time after the financial drama.
While the higher quality end is generally enjoying and reporting stable conditions and demand, the ones at the lower, mass commodity end are far more concerned and hit by the global downturn of consumption. Higher raw material prices are hitting them much harder with margins in this section being traditionally much lower and offering only a little buffer. To make the situation even worse, buyers are fully resistant to higher material and product prices.
While those at the higher quality end were suffering much smaller declines in finished product prices and had the chance to build reserves when raw material prices were at record lows, commodity products were hammered down as badly as raw materials. The situation was well described by a Brazilian tanner who decided against the trend to leave the All China Leather Exhibition a day early, fully frustrated that the local raw material prices had been pushed up by almost 50% during the general bonanza; his buyers were not willing to cooperate at all pointing at the fierce competition in retail not allowing any consideration of higher finished product prices.
Special status
Another interesting topic was raised by some during the show. What is needed to recognise leather as a premium or special product? The leather industry has still failed to secure an appropriate labelling of leather used in products. What is done in some countries on shoes is missing in others and completely failing completely when even the term ‘leather’ can be used for fully artificial, synthetic products without risking any penalty because ‘leather’ is still not a fully respected or protected term.
Design and labelling are determining the purchasing decision more and more, and artificial products have achieved over the years a more and more ‘leather lookalike’ level. Consequently, price is today the one and only factor. With a reducing number of brands and manufacturers being dedicated to leather, the long-term price stability, cutability and consistency of products of lower quality mean they are becoming stronger competition for leather.
Where the natural beauty of leather can still be distinguished, the problem is far reduced, but it pushes the quality requirements and this means more expensive raw material and more complicated manufacturing. So, possibly only fashion can resolve it. With oil prices still reasonable, leather substitutes will continue to increase their competitiveness. Rising raw material prices for lower quality materials would certainly present a massive threat and it has to be seen how long the market can sustain the present price increases, which have possibly come about more on the back of speculation than on the real fundamental facts of the market.
Meat market issues
Chemical companies and machinery people followed the positive sentiment of the show. We have to consider that a lot of the firmness in the market is also a result of the ongoing restructuring and consolidation of the beef and by-product markets. When the raw material is taken off the market by slaughterhouse groups the effect on the next step of the supply chain is always heavy. Processors and tanners always fight for the remaining part of the cake and try to be the survivors of the battle and to remain at the table. This inflates prices and in today’s world it can quickly become a trigger for the whole market.
This is the reason we have to take note of the news that JBS, the world’s largest beef processor, is considering the idea of processing all its hide production in Brazil into wet blue, crust or finished leather. The largest slaughterhouse group in Germany has taken almost all of the rest of production under its control, which has had massive influence on the continental European markets. These issues are accelerating a trend and catapulting hide prices in some markets to levels that are far above their real value, which has created today significant imbalances between a number of origins which need to be, and will be, corrected in the near future, despite the general trend of the markets.
High demand for suede
The split market continues to be in good shape. Suede fashion is reflecting further and strong demand for splits, and prices have risen. This is a bit of relief for tanners who are selling their splits and will not be welcomed by those who need to buy them. Anyway, the indications are that the split business will continue to be good in the near future and split returns should remain positive.
Also in skins the fashion for suede is leaving footprints on the market. In particular goat suede for women’s shoes is enjoying very good demand. Some of the origins in Africa, which can provide the most suitable quality, are literally outsold for some time and prices have continued to rise. The general firmness of the raw material for the leather supply chain has not yet fully reached the lamb nappa market. Suppliers are desperately trying to obtain their fair share of the recent rise in raw material prices, but we have heard of no success so far.
Coming weeks
In the coming weeks the leather pipeline will try to sort itself out. A number of consumer product fairs will take place in September just to mention only the GDS shoe fair in Düsseldorf and the upholstery show in Highpoint in the US. These should be able to let us know more about the situation in the big consumer markets in the West. We know now about China, but without a normal demand from the rest of the world the global production of leather and leather products can’t be entertained. The recent news about the labour markets are actually not really offering much excitement. However, the decisions of the retailers and their order activities are of much more interest at this stage.
As far as the shoe business is concerned at least no big stocks left from last season will be an obstacle. As far as the market is concerned we expect some irregular movements. As explained above we believe that there are a many raw material prices not in balance with their market value. This means, that we should see adjustments. However, in general we think that after the sharp gains over the summer it is time for a consolidation, which is traditionally within a frame of 10% or so. In some cases this has already happened during the Shanghai show.
Share this story:
