Market Intelligence—09.03.10
09/03/2010
The past two weeks have been reasonably quiet on the financial markets. The Greek dilemma hasn’t been solved yet and while speculators are digging their heels in to take large positions on the failure of Greece, EU and the US governments are trying to find a bail-out plan without investing further taxpayers’ money.
In the meantime, mega-speculators are trying to find new victims for their bets and the UK has also become a focus of interest, temporarily sending the pound into a sharp decline.
Politicians are trying to find ways to block or hinder base speculations. This might complicate operations on the free financial markets, but history has proven that weak economies will never receive the support and confidence they think they deserve; to restore credibility, governments eventually need to take the hard and necessary actions.
Stock and asset markets, as well as currency, have been trading generally in narrow ranges. Oil has built a base around the $80 per barrel level and, with the recent recovery of the US dollar, petrol and heating oil prices have risen by 10%–15% in non-US dollar countries.
The Federal Reserve in the US and the European Central Bank have decided to leave interest rates steady on low levels and have indicated that this will not change for some time to come. Growth in the EU is still lagging and the signs of quick and solid recovery many were cheering at the end of 2009 have faded again. Industrial orders in the EU however picked up decently in January (by 9.5%) and purchasing managers remain optimistic with a 54.1 level in February, well above the 50 that would normally signal possible expansion.
Budget deficits remain the biggest worry. They are still creating the problem of either inflation (melting away personal wealth, but also deficits) or higher taxes. Both are big evils for the economy and the private household, but as ignorant, incompetent and cruel as politicians are, there are already voices around Europe favouring one or other of them. Some even say that inflation would not be a drama as it would make people spend sooner and protect their money better. This is a pretty cynical way to at look at things, in particular for those who haven’t got anything to spend and who would be hit hard by rising prices.
Market intelligence
The market reopening after the holidays was more active than we would have expected. In particular in China you had to think that tanners would have loaded their inventories enough to give the market some chance to settle in and not to be back right after their New Year holiday looking for more product.
In the end tanners were back much quicker than expected and displayed enough willingness to purchase additional material for reduced and shortened offer lists to be absorbed in most cases. Sellers cannot resist selling at the present price levels, although they may not be willing to take large forward positions, even at higher prices.
This is quite understandable because it seems that many still remember well what large order books are worth when the market turns, as one day it will. So, it’s better to be realistic about prices and volumes. There is enough to satisfy buyer demand on the one hand and, on the other, for sellers not to feel forced into any uncontrollable short positions.
In the end nobody feels too comfortable at the moment, except possibly owners of wet blue stocks. There are more and more voices talking about traders and tanners in China holding decent stocks of wet blue in their warehouses. Some are saying that the stocks are just speculative and reflect fair-to-average quality of hides bought at the right time. Others say they are just the leftovers of the sales of medium and higher selections in 2009 and that owners are trying to push the markets higher to make their low-quality inventory look like an attractive bargain.
There are reasonable arguments for both theories; in the end, it less a question of what quality the stocks are than if they really exist.
In the meantime more and more people are becoming uncomfortable about raw material price levels. Not because of the levels, but in view of fading hopes for rising finished leather prices.
While some tanners admit that they generated enough profit and cash-flow from the cheap raw material prices of 2009, others say they received their leather orders too late and were not in the position to ‘bunker’ enough reserves for the present situation.
This is the big difference between the Asian and European leather industry. The majority of EU tanners are feeling much more pain than their counterparts in Asia, and especially China.
Depending on China
That brings us back to what is—in our opinion—the key question. Will the Chinese demand and domestic leather consumption bring us through 2010 or even further? As usual we see different opinions.
There are some who think that the present support for the hide market from China is the result of a strategic decision and the logic is that most tanneries have enough raw material to cover their needs for a production time of eight-to-12 weeks or longer. Since the average price of these stocks or contracts is well below present market levels they are not worried about supporting the market with small purchases to keep raw material price levels high. There are two reasons for this. One is to weaken the competitiveness of tanneries outside China. The other—and more important reason—is to have a strong position versus their clients in discussions about raising leather prices for the next season. After this has been successfully achieved tanneries will try to use the higher slaughter in the US and the lower production of leather in the second and third quarters to built pressure on the raw material market and to bring prices down to profitable levels again after April. This is theory one.
Others take a much more optimistic view of the future. They think domestic demand in China will remain high for at least the whole of 2010. They believe that rising labour costs in China and the government’s determination not to let the economy weaken will stimulate domestic demand enough to keep the producers of consumer goods busy and sales high. This, in combination with the recovery of the global economy, is believed to be enough to keep tanners busy and raw material demand high.
Both options are based on assumptions and expectations regarding supply and demand, and do not include the potential influence of the financial side of the leather pipeline. Our regular readers know already that we focus pretty much on this aspect as well because it has been an important and determining factor too. The supply and demand side looks pretty positive for sellers of raw material at the moment, while the tanning industry is still suffering from overcapacity in production. There can be no question that tanners are still not powerful enough to raise their leather prices in relation to what has happened in the raw material market over the past three-to-four months, and if they are not more successful next season, we come back to our topic of finance.
Too much capacity
In any case we have to consider the influence of the overcapacity in leather production. Beef production and the slaughter of cattle are down globally. Statistics are not reliable for the whole world, but we have to assume the decline is by a few percentage points at least. At the same time, the low 2009 raw material prices attracted a lot of production to run full, including extra days, and a number of tanneries that had been idle may have been revitalised. This is another reason for the overhanging demand presently in the market. It might only be a question of time until these extra ‘drums’ stop rolling because it is just not profitable to turn them any more.
The split market remains in decent shape, although prices have also stalled for the time being. Like the hide market the split market is waiting for the new fashion trends and orders to establish a new basis for future trends.
The skin market remains reasonably firm. Chinese buyers are searching for late-season skins from Europe because they offer large sizes and excellent wool return. Asking prices have seen another jump over the past weeks, but we have failed to verify optimistic requests from suppliers so far, and the last levels are about $0.50 below the price tags sellers are asking for today. Prices have gone up by roughly 50% in the past three months.
For the coming weeks it seems we will just continue with the same pattern as for most of 2010. Sellers remain in control of the market and there is little indication that they could lose this privilege in the short term. This doesn’t mean we abandon our concerns about profitability and the medium-to-longer-term effects on the market. At present almost every seller is well sold and no stocks in the warehouses are burdening their nights. Consequently none of them will have any concerns about waiting for the results of the trade shows in March. There are some who are reporting less interest and slower arrival of shipping requests and letters of credit for existing contracts and this might be taken as a signal for some market settlement. However for the coming weeks a market correction is still unlikely.
Share this story:
