German Perspective—24.11.09
24/11/2009
What happened this week: There is no question that the market remains in good condition. Demand continues to absorb production and the strong performance of other global origins is adding to further optimism in the market. The low percentage of males in the slaughter mix that we have experienced over the past four-to-six weeks is now also showing its effects. Total demand until the Christmas break is exceeding the present kill and many are hoping for an increased kill for the Christmas season, which should start by beginning of December at the latest. The paradox in the male selection is however, that the soakings in Europe will be stopped between the December 15 and 21, and in the majority not restart before the second week in January.
A few producers will use contract tanners, but the total consumption of hides will be substantially reduced for a period of two-to-three weeks. At the same time the kill will only be interrupted for a few days because the public holidays are not shortening the working weeks by much this year. The calculable surplus of hides for the end of this year and the start of next should, going by what has happened historically, put some pressure on the market, but the constant demand from China for bull hides—evident since the low prices of the first half of the year—continues to absorb any surplus, even more so since the recent increase of hide prices in the US. Consequently the cautious outlook we have given for the last few weeks was too pessimistic, although prices have not yet really started any ascent so far.
Tanners are still pretty resistant to higher asking price levels, but with the present imbalance between supply and demand it is only a question of time until the classical price reactions will take place. Despite good demand from China and the present shortage of some grades, retail and leather prices are still not fully convincing.
We all know that the hide market is not paying any attention to leather prices. And we also know that Chinese tanners are extremely sensitive to negative margins and any potential market losses. For the time being the average raw material prices for the season are still workable, but for the coming leather season in China everything is put back to zero. So the time of decision will come in January or early February when tanners in Asia will have to decide how they are going to deal with a substantially higher raw material market level than a year ago.
That will certainly make the decision about raw material purchasing much more difficult than over the past twelve months. It is pretty hard to believe that tanners will comfortably accept to start the New Year at the same levels. With their present forward positions, sellers are still watching things in a pretty relaxed manner and certainly do not expect the market to drop soon.
Trading during the week was a bit mixed. Asian tanners were only buying selectively and sometimes needed days to come to the final decision. Price increases were only moderate, with better the raw material proving more successful. On the other hand, is it still not easy to move lower grades or to speak about the price gap we still see between the premium hides and the lower selection.
Low grades, under normal circumstances, would be trading at least $5, maybe even $8 higher per piece than they are, but we can’t persuade buyers to see it the same way. European tanners are still fighting hard despite accepting that there are not enough hides are around. Only Italian buyers started to get closer to market realities after their cheap contracts booked around the latest edition of Lineapelle started to expire. All in all we would call the market this week fractionally higher with few offers around.
The kill: The kill remains a mystery. Although the numbers are moderately improving we are still nowhere near what one would expect for this time of the year. Germany is no different from many other parts of the world. Beef consumption is not at normal levels. Christmas consumption should lift the kill in December, but few really believe that the consumer is presently out for shopping domestic material.
What we expect: For weeks now we have been prudent and thought that tanners would not allow the market to get to the point we are today. Leather demand has been better than we expected. Tanners obviously need the hides they buy and shipments are requested pretty quickly. On the other hand we don’t see any buyers asking for extended contracts into the New Year. People buy what they need and not really more. The fact is that the market is pretty well cleaned up and only stocks of low quality or from questionable sources remain available. As supply and demand of the day dictate the price, it will remain firmish.
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