Market Intelligence—03.11.09
03/11/2009
Macroeconomics
The financial markets developed a bit of movement in the past two weeks and since they can function sometimes as trendsetters—even for the leather pipeline—it is always advisable to check the vibrations.
At the beginning of the period things were still following the same pattern that we had been seeing for quite a while. Speculation disposing of cash was still buying equities and commodities and sold the US dollar for this. Carry trades with the dollar being the financing currency were also still considered to be the easy way to generate bonus payments for 2009. Bank results show large profits from ‘investment banking’ although one should again ask if this is ‘investment’ or better ‘casino’ banking.
The US delivered positive news with its gross national product (GNP) rising 3.5 % for the last quarter and raising the hopes that a recovery is now finally on the way. However towards the end of the period the underlying scepticism returned. Unemployment, consumer sentiments and house prices did not perform the way the market would have liked.
No matter how economies are developing, markets are starting to deal more intensively with the possibilities of rising interest rates. In some nations (Australia and Norway, for example) levels have already been raised and slowly the markets are starting to deal with the possibility of a change to the cheap money policy. So, stock markets have been correcting sharply, oil prices fell as well from the levels above $80 and even the dollar fell back by 2% after having reached the $1.50 level against the euro.
This might be just a short break, but at least the market is starting to consider other options, and this could be the basis for the rest of the year. Those who had been well positioned in the markets in the last six months and are still holding decent profits would perhaps do well to protect their investment performance for 2009. It seems it would require very convincing arguments to invite investors to return to risky investments before the end of the year. However, who knows what the gamblers are willing to do?
Market intelligence
The past two weeks have not delivered any big news or deep insights. The leather pipeline is continuing to recover from the crisis and the only questions are about the speed with which this will take place and what the long term effects are going to be.
Like in the wider economies, we must discuss what the word ‘recovery’ actually means for the leather pipeline. There will be still a number of members along the pipeline who will not accept that there is any recovery and still claim that things haven’t become any better. This is possibly the moment now to draw the bottom line remembering that it was almost exactly a year ago that the consequences of the financial crisis fully reached the leather pipeline.
People will remember that at the end of October and into November most of their contracts and shipments turned sour. Prices were in freefall, the supply chain got almost completely congested and stocks were piling up everywhere. For almost three months hardly anything moved and hardly any normality was left. Butchers and processors were already developing emergency plans on how to deal with the excess raw hides and a good number of low-quality hides were not even prepared for leather production. Tremendous losses were generated with contracts being renegotiated and shipments simply not taken. It took well into 2009 for the product flow to start to improve again.
Winners’ enclosure
However, the first quarter of this year was still dominated by the few tanners who were well funded, had only limited declines in their orders, took good advantage of the abundant access to raw materials of good and superior quality and were able to process with inflated margins. They are definitely the winner of the crisis, but they were few and mainly high quality operators for shoes and leathergoods.
It needed a bit more time until level two set in and that was almost entirely in China. Steady consumer demand and easy access to finance in addition to political encouragement to replenish raw material inventories of all kinds led to the leather pipeline in China aggressively buying good quality materials all over the world. Most if not all of the stocks that had built up since the last quarter of 2008 started to be absorbed and prices did not only bottom out, but started to climb again. European tanners, except the few strong and successful ones, stood aside and many missed their chances.
The roads of the market were a bit bumpy. Some supplier-customer relations were still heavily burdened by the past and a number of old, not honoured contracts were preventing normal trading from taking place; some relations had to be cut. That forced several buyers to open new supply sources and gave some sellers new opportunities; in some cases the sellers did not even know where these opportunities were coming from.
However, confidence in the market remained fragile for a long time and this was why the reaction to improved demand in the second quarter of 2009 did not provoke as much enthusiasm as we might have expected. As spring progressed, the more confidence was gained, more of the old ‘stories’ were settled and more normality entered the market. Consequently the market built up further strength, more for the quality top end and to a lesser extent down the quality line.
By the end of the summer a number of sellers were already becoming a bit too excited. Also, the currency markets increased their influence on global prices structures. So, in many markets prices saw their peaks around the Shanghai fair at the start of September. They have eased since then, with the only exception being top-quality materials.
All in all, reasonable values have returned to most markets, and this is a good reflection of the normalisation of the markets in general.
So far the market recap, we should just remember how much has happened in only a year. In a longer-term price graph the market collapse was again just a blip and everyone was well advised to use all financial resources to take advantage of the situation. Considering, that the world is still populated by almost 7 billion people, extended pessimism would not be a good advice.
Changes in the pipeline
However, as usual it is not as simple as that. The leather world and the leather pipeline have changed a lot in the past 12 months. Structural changes are inevitable and happen all the time, but in this case, they have accelerated in the past year.
Among the changes, there are some that we find particularly remarkable.
First, the massive consolidation process in the Brazilian beef industry and the rapid global growth of the same, which is accompanied at the same time by a strong vertical integration in the production chain of the number one by-product, hides.
Production is being extended further and further and has reached a temporary climax in the purchase of one of the larger producers of automotive leathers. Whether this move is going to be successful or not needs to be seen, but it may possibly have two consequences. It could become an example for others and it could also trigger the interest of large tanning organisations to consider tie-ins with the raw material world to secure uniform and consistent supply of materials to optimise their production and organisation.
What could be even more a factor in encouraging the beef industry to control more of the vertical production chain is the experience last year when raw and wet blue customers did not respect their contracts and a large number of containers had to be either renegotiated or even shipped back. In addition big stocks of material piled up at origins and the industry felt pretty powerless in this situation. The beef industry is neither experienced in, nor enthusiastic about, this sort of scenario as they are used to being in the driver’s seat as the first owner of a raw material.
The second important change to have taken place in the leather pipeline in the last 12 months is the great shift we have seen of leather production to the Far East. This trend is not new but the fact is that the European leather industry, and in particular mass producers in Europe, had been defending their positions for much longer and better than most expected. The upholstery tanners in northern Italy are the main example, but not the only one.
Even with productions bottoming out and the recent recovery, production levels are still well under those of mid-2008, with no further growth in sight. With consumer markets in the west still pretty flat and domestic consumption in Asia being much better, the quality level in Asia is quickly improving. The currency situation is unfavourable and financial resources much less available, so it is unlikely that Europeans will be able to make up the loss in production. The crisis had just provoked and accelerated what was overdue for quite some time already.
Production capacity in Europe was excessive and needed to shrink. The levels of production have come down and only high-end, niche producers and flexible units can find their positions in the consumer markets close by. With improving production standards elsewhere the potentials for exports will decline also. Any return of production to Europe can only be expected if the mainstream global brands lose market share and consumers return to ask and look for more individualised products, which would be easier to manufacture in smaller units and close to their target markets. There is not much sign of this happening, though.
Decent demand for splits
The split market continues to be favoured by fashion and there remains decent demand in the market. Not all tanners are able to find the quantities of the materials and types they are looking for. Better demand and prices are obviously also supporting the prices for grains and assisting tanners in their calculations.
The skin market continues also to benefit from the general recovery in global demand. Fine wool skins are still in strong demand due to the boots fashion and for lining purposes. Goats and hairsheep are enjoying improving conditions due to decent demand from the women’s shoe market as an alternative to expensive calf leathers and some are also speculating on better conditions for normal nappa garments in 2010. Since skins are basically still pretty attractive in price and haven’t shown any larger price increases so far, the general optimism is slowly starting to spread into this field as well.
For the weeks to come we still fail to see any reason for larger moves in the raw material market. Buyers will remain prudent as higher prices levels will not be compensated by leather buyers or the existing contract. The car upholstery tanners seem to have covered their immediate hunger and are not pushing supplies any more. If the kill in Europe rises towards Christmas, the supply side should also reduce their price ambitions. The upcoming Christmas and New Year holidays will also reduce shipments, which should dampen some of the optimism around.
On the positive side we would say that market is pretty well cushioned. Most sellers are in balance or even forward, so that a few weeks of lower sales and shipments will not create any panic or attempts at aggressive stimulation by price reductions. In the US the seasonal effects (winter hides) could trigger some price pressure, and also currency movements will be a factor. However, we don’t believe that any of these arguments could push prices far away from the present levels.
Share this story:
