What happened this week: Too many EU tanners had not replenished their stocks in time and waited until the leather orders arrived. When they got them at the end of 2009 they did not see any margins with the eroded leather prices after the crisis. So they decided to wait again in the expectation that the raw material market would take notice and react accordingly.

We now know the end of the tale. Leather business turned out to be better than the tanners admitted and expected. Their stocks have been, and are, inadequate for the market budgets of 2010 and this is pushing them into the raw material market which had already been pretty much emptied by the anti-cyclical buying of the Chinese producers.

What started as a moderate trend in the second quarter of 2009 and took a break in October has become a veritable bull market since December. All the consequences have come with it. Prices are climbing fast, sellers are surprised that the higher prices are not dampening demand and actually don’t know the real value of their material anymore. This has gone so far that some packers and processors are no longer willing to book prices for a normal timeframe, for example one month, but are only willing to fix quantities for the period, while prices have to be negotiated from week to week.

This is a classic sign that the markets are starting to get out of control and the fair valuation of the products is being lost. This is neither new nor will it be the last time it happens, but it was and is the forerunner for all the problems related to such market circumstances. However, for the moment, and most likely for the near future, we have to manage the situation and this fundamentally means a material shortage and rapidly growing problems with the profitability of leather production.

If the information we are receiving from the industry is correct, then price increases for finished leather are hard to obtain—if there are any at all—and in some cases leather buyers have even had the guts to ask for discounts. At the same time, tanners were so eagerly scrabbling for business to fill their productions that they are now in double trouble. On one side they need the business and production and on the other side they are trapped in a raw material market that offers insufficient supply and price levels that are loss-making at replenishment costs.

In the end the tanners had little option. Nobody wants to lose a client when the market picks up, so not buying and producing is not an option. At the moment tanners are willing and forced to run the risk that the present investment in the market and in their clients will eventually be repaid. Despite the fact that the market is presently in a rock-solid situation and supply hasn’t met demand for a while, we still see more risk than opportunity in the long run.

As usual, packer prices will overreact as short positions, demand and low stocks are always an explosive mixture for prices; no matter whether they are justified or not. For the by-product the last drop will be squeezed from the market. It’s anyone’s guess when this will happen.

The next chance for a break in the market trend might be the Chinese New Year. So far the Chinese haven’t shown any sign of fatigue in terms of investing in raw hides and skins. When they take the break some of the upward pressure will be removed at least. However, holidays mean nothing to them when they actually think it is better to remain in the market. So the coming period will tell us quite a bit.

Trading was active this week. Interest came from all over, but was again mainly dominated by European tanners, followed by isolated bidding and buying from China. Towards the end of the week activity slowed down a bit, but this means nothing as hardly any hides are available. Prices moved up in anticipation of higher levels at the abattoirs even though nobody actually knows what the levels are going to be in February.

The kill: The kill was pretty steady, but we saw a massive shift from males to females. The percentage of bull hides was again at a record low. Weights are slowly starting to reach normal levels for the season. In the coming weeks the kill should be steady before falling back around the carnival season. Let’s just hope the weather won’t cause further problems.

What we expect: The market has certainly remained firm. The question is how much courage the sellers have as far as prices are concerned and how many tanners still need to cover orders. It will take a few weeks to tranquilise this market and to create some kind of fear or caution on the part of the beef and processing industry. For the moment we still see the main risk for the market in the financial consequences the situation creates. The coming weeks will be determined by further declining offer values, possibly suppliers not meeting their shipping obligations and tanners working on options to solve their present market problems.

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