Market Intelligence—17.11.09
18/11/2009
The financial markets seem not to be too willing to take risks. Investment banks are reporting healthy profits, made on the fantastic combination of cheap money, a falling US dollar and rising asset markets. Almost perfect conditions for generating profits (and bonuses). Who cares about productive and visionary money investments in the western world any more? We had better leave this for the governments and taxpayers to deal with along with the increasing numbers of jobless and low-paid workers. Let’s face it, if we in the west continue in this way we will face some ugly problems pretty soon.
Whether we like it or not, there is no comparison with the emerging markets. They are where we were 50 years ago. Government budget deficits are rising, adequate job offers can’t be made in the short term and social tensions in societies are going to be a tremendous challenge in the future. We need a revolutionary kick from inventions or technical progress soon to avoid the problem.
The financial markets have been pretty boring. It is quite obvious that nobody wants to take any major risk or position in what remains of 2009, which would be to risk the performance of the year so far. Results and bonuses are secured and everyone is scared that something unforeseeable could damage everything. Consequently we are almost stuck or range trading in whatever it is. The dollar, stocks, commodities … you name it, it bounces up and bounces down, but all in a pretty narrow trading range and the markets are loath to let the prices move out of the range any more. This is no guarantee of anything and we would be surprised if anything happened between now and the end of the year; it is quite obvious that the market-makers and traders would love to close the books already for 2009.
From the general market data there were not too much interesting news. Unemployment rose in the US and consumer confidence is falling. In Europe economists were celebrating the end of the recession with 0.4% growth in the EU zone for the last quarter. They forget that at this speed it will take years to return to the levels of even 2008. Meanwhile we still see increasing unemployment and fading purchasing power.
The dollar continued its trading range against most currencies, and so did most commodities and stock markets. Gold managed to cross the USD 1.100 hurdle while oil still could not manage to rise constantly above $80 a barrel.
Market intelligence
Despite the conservative outlook on market trends in our last issue the markets continued to present themselves in a reasonably firm tone. In particular better-quality hides still saw constant demand and with most suppliers being pretty well sold ahead, there was little to buy. We would not say that there was huge amount of interest, but with little-to-no offer around, it was enough to lay a base for a firm tone.
We would say that the market presently is more supply- than demand-driven. The global kill is down, the killing season in Europe is not producing the numbers most producers expected and in the US packers created a comfortable forward position to allow them take the situation pretty easy also at the beginning of the winter season.
It must also be mentioned that the demand for hides is still mainly focused on better-quality material. We have known this for some time and as long as the market continues to rise it will not be a big issue. But price increases for leather have been almost impossible to obtain in the last season and tanners are none too optimistic about prices for the near future either. Leather buyers and retailers remain stubbornly against raising leather prices and this is squeezing tanners.
With the sharp gains we have seen for good-quality raw materials since the second quarter of this year there should be indications for the lower end to follow, with buyers moving for price reasons into lower-price materials. So far not much of this has happened; quite the reverse, the traditional price differences between high and low for the various origins, grades and selections are larger than normal.
If we accept that the market will solve things, the the valuation gap will have to close eventually and that means that either the high-quality material will come down or the lower end will come up. Presently a poll in the trade would most like see a vast majority favouring the latter. If the trade is correct we need to evaluate the chances for a comeback by the low grades.
Consumer demand
It doesn’t need any scientific research to know that it all depends on the demand for leather in consumer products. This is difficult to answer, but let’s look at what we know today.
Leather production has recovered and we can assume that upholstery and automotive leathers are today ranging at between 80% and 90 % of the level we were seeing until the crash. High quality has been hit hard and should be probably at same levels as before, while the lower end is fairly below the standard levels.
Shoe and bag leather production will be not far away from full levels and will probably be at between 90% and 95%. Considering the growth of consumption in China and the continuing fashion of ladies’ boots we would not be surprised to see that total production in square-feet is already back to the pre-crisis levels. Garment is certainly way down and the other sectors can be ignored.
This has led us into a situation that, with the shift in demand and as a consequence of the low prices for premium hides in the first half of the year, production and consumption have moved upwards in the quality ladder. Just as you pull up a blanket that is too short, it is the high end that is uncovered and the low end that is well protected. There are not enough hides and leather to meet the quality demand and there is a surplus of material waiting for the commodity product demand to use it up.
Orders in place
For the coming season most of the orders are in place already. Normally the first quarter of the year is rather slow for side leather production and stronger for upholstery. But upholstery is not a driving factor at the moment and, as the strong performer, the influence of the shoe business should be bigger this time. For orders under production now, the quality and price decisions have been taken, but for next season the decisions still need to be taken.
Price pressure
Most of the tanners one speaks to do not expect to be too successful in trying to push leather prices up in the first quarter of 2010. Everybody says that international retail is still struggling far too much to try to get more money out of the consumer. The people buying value for money will continue and keep up consumption levels, but pushing selling prices higher when bargain shopping, rebates and sales are dominating the scene is not on the agenda. Traditionally, downgrading quality or reducing leather consumption in the product is the answer, and this, for us, is the turning point.
A market with full confidence would have already reacted. Speculative money, long-sighted operators, players well aware and informed about the total pipeline would have already taken the opportunity to secure cheap stocks that are available in absolute abundant volumes. Nothing of this has happened. In addition, we should not forget that the total rebound of the market was actually based on the tremendous recovery and stimulus in China. Without this the situation would not have recovered the way it has.
Another subject of worry is the situation in some of the supply markets. We dealt with that already in the last issues and also at the start of this one. The decision of the large Brazilian beef companies to buy tanning operations and to control and cover the leather pipeline much further has led to concerns in the tanning industry, domestic and international, that competition could become too strong in view of raw material supply control and market position. The concern is that these conglomerates will, in time, not only control the added value chain, but also control the raw material supply market so much that competitors will be left with few possibilities.
These concerns have also led in the recent past to more market activity and focus on raw materials than might be justified from a simple supply-and-demand standpoint.
So, in conclusion we feel that the medium and higher standard hides are today at the top end of their fair valuation. For the time being, there is little indication that the entire leather demand is strong enough to push prices for low grades much higher to close the gap and we doubt also that there is much room for leather prices to climb soon to enable tanners to pay even more for hides. There could only be room for price increases if the expected inflation comes, and this will only happen as a result of more consumption. The decent consumption and the reasonable business many tanners were enjoying for most of 2009 were actually mostly borrowed from the cheap raw material prices seen until the late summer.
As far as market activity was concerned in the last few weeks business was called decent by most suppliers and, except for us, there is a widespread optimism on the supplier side that the upside move hasn’t run its course yet.
The split market is still in reasonable shape. However, it seems that the business for gelatine and collagen splits is slowing a bit. Split leather business is still enjoying reasonable demand at least until the season ends. For the coming season, though, the recent leather shows did not display as many split articles as we saw in 2008 and 2009.
Conflicting reports
The sheep and lambskin market are still delivering conflicting reports. While fine wool skins are still sought and prices have been advancing sharply over the past months, skins that are of medium quality and mainly suitable for nappa productions, are seeing ups and downs. One week demand is brisk and one could image that they are following the recovery of cattle hides, but the next week all is pretty dull again and it seems that business is becoming idle. Double-face is pretty much out of fashion, which is hitting the tanners in Turkey in particular. In China the interest for wool is the driving force behind buying and a clear picture about the business for nappa leather is hard to come by. Goat skins are still benefiting from the positive business in ladies’ shoes.
For the coming weeks we would not be surprised to see much of the same. Sellers—with their comfortable sold ahead position—will try to squeeze the last drop out of this market and most likely they will still find some victims. On the other side, the most decisive time will probably be mid-to-end December when shipments for the Chinese market will enter the final phase of high-season production.
What will come next, after the Chinese New Year, remains to be seen. Sure, tanners will need raw material to run their factories, but we should all have learned by now that they would rather do this at a profit and not at a loss. Without lower raw material prices or higher leather prices this will be a great challenge. So for the weeks to come the situation might still be reasonably easy, but for the time after it might be wise to watch things carefully before taking decisions that last into 2010.
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