German Perspective—12.01.10
12/01/2010
What happened this week: Many people seem to believe that 2010 is starting with a better perspective than 2009. Well, we would like to agree, but to us it looks pretty much like the opposite. Exactly a year ago we had a situation in which many companies were scared of losing their businesses due to a lack of orders, being threatened by huge losses on inventories, being in pretty tight cash positions and not having any clear indication when business conditions would normalise again. So far, so bad, but how does it look this year?
Well, the stock is gone, the business has normalised and the vast majority is of the opinion that the worst is behind us, that leather demand is going to grow and things are going to improve in line with the predictions of a recovery of the global economy.
In an easy world this would be true, but the leather field isn’t easy and the present situation might be even more challenging than a year ago when everything looked so grim to many. With rising raw material prices, not only have margins been eroding, cash-flow is also getting tighter. With most of the cheap stock being eroded, the tanning industry is now feeling some pain because leather prices do not keep pace with rising raw material prices, or do so only after a long delay.
While banks are trying to cut commercial exposure down, many leather producers are in desperate need of extended credit lines for the business year 2010. While in the past part of the financing could be transferred to the suppliers in the way of extended payment, trends are now the opposite, with credit insurers cutting down coverage and suppliers smelling the risk and looking for tighter rather than extended terms.
Last but not least is the rapid concentration in the slaughter industry, in particular in South America. This, and the decision to control more of the marketing and production of leather, has also reduced the options of supply and negotiations for many tanneries around the globe. In a market like this, with reduced stocks along the leather pipeline, it’s not an easy position to deal with fewer options. The trade may seem reckless sometimes, but butchers have no mercy when things are in their favour, which could be even worse. Some have already had a bit of a taste of it, and others will learn fast.
Business during the holiday season was reduced, but not dead. In Europe tanners were officially on holiday, but one had to be impressed by the number of available drums that have taken hides, so that far less production had to be salted during the Christmas period than expected, and not many hides have built up during the shut down. Overseas buyers have remained cautiously active.
If there is anything positive in the trend then it is the recovery of demand for low grades. This has offered the opportunity to clean up the edges and the price levels that can be obtained allow for the flaying and processing of renderer hides again. Sales made during the holiday season had been mainly focused on dairy cows and low grades at moderately improved prices. Isolated demand for bulls could also be satisfied, but the re-opening of the European market after New Year showed a wave of interest for males that suddenly developed a firmer tone to the market. In particular automotive tanners were actively seeking to cover their needs, which made the opening for the abattoir buying for 2010 a difficult job again.
It seems that prices at the abattoirs are rising faster than the selling market, which makes it a problematic start to the New Year. With the US steer market only just stagnating, buyers are trying to resist as much as they can against a firmer trend in the EU. Without too much success so far.
The kill: The kill has been quiet so far, but with the very cold weather productions have been pretty reasonable after the seasonal break and the first week brought more hides than we expected. Weights are still a bit disappointing for this time of the year. We hope that the rest of January will be positive before the slower production returns in February. It would be good to ease the supply stress by a bit more slaughter.
What we expect: At the moment market is, and will remain, supply driven. We still do not share the general enthusiasm, but that is not really of any interest. As long as the warehouses are empty and tanners have to cover existing orders, the needed replenishment of the pipeline will protect the market from a sharper correction. However, the longer it lasts and the higher prices move, the more the tanning industry and its clients will look for chances to get out. A market that is almost constantly rising for almost nine months in a row is building higher risk potentials. And in Europe we should not forget, that the market today is ruled by the Chinese.
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