German Perspective—26.01.10
26/01/2010
What happened this week: Well, last week was another very turbulent week. The caravan we thought we had missed last week did come back round and we had the chance to jump on during this week. As concerned as one may have become about the market dynamics over the past weeks, one has to be impressed by the amount of interest and readiness to buy from all over. Even more so when everybody, including us, has been warning for a while that this market could be overdone. Anyway, whatever one thinks, many tanners around the globe seem either to have a different opinion or simply so many leather orders to cover that they are continuing to replenish their inventories and will buy more product this week too.
The more this trend continues, the more people are coming to have concerns about how long this can actually last. Well, and this has also already been said a number of times, as long as sellers continue to have empty warehouses and even forward positions it is pretty unlikely that this market will run out of steam. Sellers are just checking where the possible ceiling of prices could be and how far they can push them until the demand fades and the trend can either be stopped or reversed. As long as with every price increase asked there is still a buyer willing to pay it, the bull market will remain intact. There is always a risk with such developments. There is general agreement, that the present price levels are not reflected in the present price levels for finished leather. Consequently one has either to bet on a fantastic future of consumer business, which would force brand names and retailers to pay the equivalent price increases for finished leather and finished products, or it is only a question of time until the present orders are covered and tanners have to return to more serious calculations of their business.
It seems, that the major reason for the present bonanza is that the results of tanneries for the year 2009 are different. There are obviously a number, in particular in Asia, that have been in a position to take full advantage of the cheap raw material prices of 2009 and they are now willing to invest some of their profits around the globe. Another argument might be the general enthusiasm about domestic retail business in China. For the time being at least there are still enough players around who are willing to invest in raw material. This not only supports cattle hides, but we are also seeing strong demand and price performance in other articles as well. Even the low-grade section has seen full benefit, which is enabling many to clean up their warehouses. Tanners should be pleased about this too because they should now be able to turn a lot of their low grades, which had been stuck for quite a while, into cash. This does not, however, solve the problem of the replenishment cost for the grades they are mainly looking for.
Interest throughout last week was basically for the full range of products. Chinese cow buyers were back and the European market still seemed under-supplied for heavy, good quality material.
If there was any indication of an end to the present trend, it was that some of the automotive tanners indicated that they will reduce their levels of purchasing and production from February onwards. How true this turns out to be, and the influence it could have on the market, remains to be seen, as does the activity the Asians are going to generate during their holiday break. One thing it pretty clear: mobile phones also work during holidays and history tells us that if they want and need material, they will buy during their vacation too.
Prices went up again this week, supported by the weak performance of the euro. Cows advanced by between 3% and 5% and bulls by between 2% and 3%. Cows are starting to reach what we call ‘danger territory’ prices. We are only a few percentage points short of the levels at which, until now, the market has always started to turn sour.
The kill: In total number the kill remains to be good. However, the slaughter mix is a bit odd. Suddenly the kill of cows has gone up sharply, as have weights. This is helping calculations of course, but the restricted numbers of bullhides are not yet easing supply pressure. This is also reflected at the abattoir door where bulls are fetching a decent premium. For the coming week the weather is supposed to remain cold and we expect the kill to stay stable, but we are not sure about the slaughter mix.
What we expect: We can actually only repeat ourselves. The market dynamic remains unbroken, but we don’t like it. Presently one has the impression that before the market turns, it will overshoot and really kill demand. We wouldn’t like that, but there are too many seeing more advantage in further strength rather than a stabilisation or a set-back. So, this coming week, we will start with ambition and optimism, but with more and more people feeling uncomfortable, the level of alert has definitely sharply increased over the past weeks. However, concerns will not directly translate into lower prices.
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