German Perspective—13.10.09
What happened this week: The week was less active than the previous one. China, for the first part of the week at least, was on holiday, only returning from Wednesday onwards, with buyers checking to see if there were any bargains around. The continuing decline of the US dollar against the euro did not help much either, so trading was neither active nor very attractive overseas.
In Europe the situation was a bit mixed. While cows are still facing pressure with more slaughter than demand, bulls are still in decent demand and there are still not enough buyers around to absorb the current slaughter. Cow buyers are trying to push prices lower in sympathy with the general market trend, but sellers are reluctant to consider lower prices in view of the uncertainty of the further development at the abattoirs. Bullhides are today comparatively expensive and should moderately correct in view of the weak dollar and the prices available for other alternatives from the US.
However, the demand from specific producers is still enough for sellers to defend their positions. The USD is presently aggressively chasing the 1.50 mark against the euro and it seems that the international speculation is back to habits we saw in the build-up to the collapse of September 2008. The ongoing weakness of the dollar will again undermine the competitiveness of the European leather industry, but it will also undermine export revenues for raw materials. As happened the last time the dollar fell to record lows of EUR 1.60, it will be recognised that the overvalued euro is going to help other countries in the crisis much more and will burden the EU economies significantly.
EU officials are discussing an extension of the anti-dumping duties on exports of leather shoes from China and Vietnam into the EU. Despite intensive lobbying, it seems that the EU Commission is going to extend the duties for another at least 15 months. The market for high-quality and commodity leather is further separating and the gap between prices is widening. Demand for high-quality leathers has remained pretty steady during the crisis, while demand for commodity products is sagging, in line with reduced global demand and the cautious planning and forecasting of retailers and brand names. The increasing use and promotion of leather substitutes will also have a negative impact on demand for the medium and lower grades. Consequently, the return for leathers at the lower end, in most cases, is not sufficient to cover today’s raw material costs. This is pretty well reflected in the headwinds we see for the prices of dairy cowhides since they surpassed critical price levels in July and did not attract any speculative buying. Many of these hides were bought in the second quarter just because they looked cheap rather than as a result of leather demand or proper calculation, and this blinded sellers as to the real value of this product. The road to an adequate price level is rough and tough, but fortunately the first steps are being taken.
For males, the situation is rather different. The demand for good quality or high substance forces tanners to buy the material to keep production and to serve the market. The problem remains that not all hides qualify, and the low grades that have to be accepted in a lot can neither be sold adequately in volume or fetch the price needed to compensate for raw material price increases. In spite of good demand and the top end doing well, there remains a high risk for profitability for many tanners who need to decide either to cut production and to bear the overheads, or to build up stocks that cannot be placed at an adequate price today. The difficult situation at the low end is also reflected in the news that a large trading and tanning operation with production facilities in low-cost and low-quality areas around the globe went into receivership last week. Stocks of commodity wet blue have been in the end been too much of a burden. Unfortunately this will again leave a bad taste with banks and credit insurers at the wrong time.
The kill: Not much of a change. The seasonal influences are less and less every year. Butchers are complaining about profitability, demand and prices and the kill is not really rising as one would expect for October. However, the seasonal logic will apply sooner or later and numbers should continue to expand slowly over the weeks to come.
What we expect: Our expectation that prices would stabilise proved to be wrong for cows and right for bulls. And this is also what one can expect for the week to come. Chinese buyers will be back from their holidays and their activities will determine the trend. A strong round of buying of dairy cows is needed to set new levels.
