What happened this week:  Demand remains strong and not all requests can be satisfied. There are not enough hides available to fulfil the short-term needs and the lower kills are adding to the present shortage. The market is reacting with the classic reflexes of higher prices and limited activity and it is difficult to find any realistic valuation for material with butchers and sellers, who are testing how far they can push it. Some are seriously testing, and others are trying to scare buyers away, by asking levels that are completely beyond consideration.

So it is very difficult to speak about any realistic market level today as the prices quoted are showing a spread that hasn’t been seen for quite a while. On top of this, nobody really knows whether prices circulating are traded, quoted or dreamt. So the daily uncertainty is growing and a great number of phone calls this week between colleagues and customers were made in an attempt to figure out what the real situation is.

Hardly anyone is denying that, for the time being, the market has run into something of a labyrinth and no exit has yet been found. The main questions are: a) how good is leather demand really; b) are there still open to buy positions or are tanners buying for the sake of security in response to the market trend of the past months; and c) how long will financial resources allow tanners to follow the market under these conditions when they are starting to produce negative cash-flow at the present levels already?

Looking at the absolute prices we have so far just corrected the valuations and reached long-term averages with the exception of dairy cows, which have already entered 'dangerous territory' by trading at around $60, depending on weights and quality. For males and shoe upper related material, prices are just about at the long-term average and people are now trying to push the limits. So it is currently more about the speed of the price increases rather than the levels. The raw material markets are always adjusting faster than the leather prices and long-term levels have more of an impact than the present problems.

This leads us to the question of whether the consumer markets will allow the equivalent prices for leather based on today’s raw material levels. If we exclude the luxury section it leaves a big question-mark to say the least. Despite the general rise in raw material prices since the first quarter of 2009, alternative products have not seen any similar movements yet and the oil price at around $75 does also not indicate that oil-related components will see any major increases in 2010.

This doesn’t even take into account the harsh retail conditions in most markets, where price increases for products can hardly be obtained and once again it is only in China and some parts of Asia that significant rises in consumer prices can be seen so far. With most prices for the current season being fixed anyway, it will be a while before tanners have a realistic opportunity to fight for compensation in the recent raw material price trend.

Consequently, we see a lot of fatalism around. Tanners are complaining, but they have realised that their options to fight against the trend are limited. There is hardly any supply region where hides are presently waiting for buyers and so there is no real escape lane. Not many tanners have built or are holding any security stocks, so the option to refrain from buying does not exist for many who have orders in hand.

Trading during the week was limited, mainly because of the limited volumes available, but also because abattoir prices for February are still just a guess and this make serious offers for March-April deliveries a gamble. So, sales were limited to existing stocks and some programmes in export material; predominantly for cows. The decline of the euro helped calculations and is, at least for the moment, absorbing a bit of the pressure. Buyers were seen from all over—mainly from Europe for bulls and, as usual, from Asia for cowhides and ox/heifers. Asking levels were obtained with the help of the currency. 

The kill: The kill remains on the low side. In our areas, the bad weather is still having a strong influence and in the rest of the country the upcoming carnival season is having an effect. The biggest problem is still the low kill of males which we have seen, to some degree or another, since mid-2009. The number of cows in the mix indicates further diminishing of the herd. There is no indication for any short-term change.

What we expect: Despite the concerns about the long-term effects there are no indications that the present imbalance of supply and demand can be resolved in the short term. Beef production will not resolve it, and inventories and sales are not indicating any short-term correction. The holidays in Asia might offer people the chance to take a breather, but will not lead to any fundamental changes. Only when leather demand eases, financial issues surface or tanners take a break in buying will the tone change. 

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