US Perspective—08.09.09
08/09/2009
The Jacobsen Commentary and Market Opinion
Courtesy of www.thejacobsen.com
Although there have been encouraging reports from housing and manufacturing lately, the latest US unemployment and retail sales reports remind us that recovery of the economy is not a done deal. In August, US unemployment jumped to 9.7% from July’s 9.4%—a 26-year high. The labour department estimates that US payrolls have dropped by 6.9 million since the recession began in December 2007. Meanwhile retail sales in August declined for the twelfth straight month. For any recovery to be sustainable it will need to have the support of consumer spending because that makes up approximately 70% of economic activity. On a bright note, retail sales did better than analysts expected.
Market activity was slow with a few business trades beginning to trickle in following the All China Leather Exhibition (ACLE) in Shanghai. Prices this week appear to be softer with the Jacobsen Price Index steadily trending downward. The drop does not completely encompass what was estimated on steer selections in the Jacobsen ACLE report from Shanghai or feedback from those attending. Several sources confided steer prices off in the $4 range. Trades reflected a wide range for HNS and dairy cows, likely influenced by the swift change in market conditions and a diverse array of perceived quality dependent on sources.
Slaughter during the week leading up to the Labor Day weekend is estimated to be 655,000. This is 1,000 more than last week and 59,000 over the same period last year. The year-to-year increase is due to the Labor Day holiday falling in the same week last year.
As expected, last week’s sales numbers were extremely low with a combined 303,600 wet blue and hides reported on the latest USDA Export Sales report. This follows low numbers of 434,000 the previous week and is considerably under slaughter of 654.000. Gross hide sales were 75,477 pieces higher than net sales of 329,126 with cancellations or adjustments in Korea (60,857), Hong Kong (5,441), and Taiwan (4,428) making up the bulk of the difference. There were no significant changes on wet blue grains or whole hides. Combined hide and blue exports for the week were up compared to sales at 669,000—15,000 head more than kills.
China bound
Shipments of hides once again were primarily to China with just under 59%. Wet blue shipments’ main destination was also China with 33%, followed by Mexico with nearly 26%. On a year-to-date basis through week 35, USDA reported shipments are 22.9 million—exceeding kills by 914,000 or 4.17%. If a modest domestic use of 24,000 hides per week is added, the total depletion of supply is 1.76 million, nearly 8% above slaughter or hide supply generation.
Feedback from traders attending the ACLE is continuing to come back with a common theme. First, there has not been much trading, but the fair was well attended. Secondly, there seems to be a consensus among pundits that the market direction has not been established yet. Many do not expect that this will be clear before next week. And finally, with regard to prices, steer selections appear to be softer while cows are somewhat stronger. An unconfirmed small amount of business was conducted under $60 C&F for NHS,HTS, and BBS.
Buyers are pulling in their horns, determined to hold their ground and looking to buy down. They maintain they are already shackled with prices beyond the support level of their leather markets and their resolve is convincing. In anticipation of a potential drop, it is rumoured that some sellers have lowered their prices. A couple of sources indicated prices being kicked around for steer selections at somewhere between $56 and $58 C&F, depending on source and selection. These numbers seem quite low considering the pre-fair market. Surely we’ll know more soon.
US car sales up
In the auto sector, the ‘Cash for Clunkers’ incentive programme boosted August auto sales to their highest monthly total in over a year. Nearly 700,000 new sales were generated with the $3 billion dollars incentive. For the month, 1.26 million units industry wide were sold. With August being the best month in a year, experts predict that September may be the worst after buyers pulled forward their purchases from future months. The degree to which the programme borrowed from future sales is not clear but Moody’s Investment Services estimates that about 60% of the vehicles purchased under the programme would not have been bought otherwise.
The stand-off between tanners and suppliers continues. For those who arrived in Asia early and visited tanneries in Korea and China last week, business has been scarce. Anything over $60 C&F is the threshold tanners will not cross. Beyond this price point, tanners claim that they lose money given current leather prices.
One non-confirmed trade for HTS at $57 has been mentioned by several sources but for the most part, buyers are expecting they will buy cheaper further into the week. One contact expects the price under $55 for packer HTS or BBS with others thinking they may be a bit lower. This would tend to support the $60 C&F targets coming out of China.
Although suppliers are heading into September with fairly good forward sales positions, buyers have noted that availability on most selections is good with HNS seemingly plentiful following tight supplies this summer. In general, the bullish demeanour of suppliers seems to have been replaced with a question mark. Not quite bearish yet, many are concerned where the market will go. Has the market over-extended and is it due to correct?
On a bright note, even if the market sees a correction, with the economy not anywhere near where it was this time last year, chances are it will be nothing like the drop following ACLE of 2008. The Institute of Supply Management (ISM) reported that the US manufacturing sector grew in August for the first time after 18 consecutive months of declines. The index rose to 52.9% from 48.9% in July with anything above 50% indicating growth. The ISM said that 11 of 18 manufacturing industries, including leather, textiles and apparel, showed growth in August.
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