US Perspective—16.03.10
16/03/2010
The Jacobsen Commentary and Market Opinion
Courtesy of www.thejacobsen.com
We began last week with expectations that the market would be firm and possibly increasing a dollar or so. There were no surprises for the week until Thursday; the Jacobsen Price Index increased $0.76 to $65.56 and ended the day at $66.14, up $.0.67 from Wednesday.
Both tanners and traders expressed a high level of frustration this week as they lamented the soaring market. While all steer selections are experiencing this pricing boost, heavy native steers have seen a sharper spike and are now trading above $70. The selection currently appears to be in short supply while its demand is quite strong. The result is we may see the spread widen between natives and other premium steer selections. Over the past 12 months, this spread has typically been around a dollar, which from a historic perspective is quite small. Many of you may recall times when there was a much greater spread than there is now between natives and heavy Texas steers or butt-branded steers. For instance, looking back nine years to date through our Jacobsen archives, the spread was $7 with HTS at $70 and HNS at $77.
Estimated daily livestock slaughter this week is 617,000, up 4,000 from the same period last week and down 4,000 from the same period last year. Yesterday, the US Department of Agriculture released actual kills for week ending February 27. Actual slaughter that week was 635,545 compared to estimates of 632,000. Kills were comprised of 47.3% steers, 30.9% heifers, 20% cows, and 1.8% bulls.
One source noted that suppliers are being conservative on pricing in consideration of what the market can bear. It is difficult to assess what impact—if any—this might be having on overall market pricing, especially given the volume of higher-priced trades reported. Trades saw several selections break into new territory. In particular, medium HNS sold for $71, butts hit $69, and CBS increased to $62.50.
The USDA Export Sales and Shipments report for the week ending March 4 shows a significant pick-up for both sales and shipments of hides and blue from the previous week and year-to-date averages. Last week, combined whole hide and wet blue sales were 686,500 and shipments were 643,800. The previous week, the numbers were 470,000 for sales and 567,400 for shipments. Year-to-date combined sales averages are 536,122 and shipments are 562,433. For comparison, slaughter last week was 617,000.
On the sales end, there was a significant adjustment of 76,872 for whole hides. The primary areas for these reductions were Korea at 63,872 and Taiwan at 8,010. Wet blue sales did not have any notable corrections. Weekly sales numbers for wet blue were 104,200, trailing yearly averages of 123,244 by just over 15%.
The way suppliers are talking, it appears there is a push to increase prices again. Keep in mind that the Asia Pacific Leather Fair is quickly approaching and it is not unusual for the market to behave this way.
As was discussed in several previous articles, prices are fairly high from an historical perspective and the rate they increased from their lows in the $20s to current levels approaching $70 was very quick. For tanners, it was much faster than they were able to increase leather prices. In particular, shoe tanners with excessive industry capacity have been hit hard as leather buyers leverage this overcapacity to hold prices down. Most suppliers acknowledge the tanners’ dilemma, however, they are in business to maximise profits and that means selling hides for as much as the market will bear.
While suppliers and tanners are of the opinion hide prices are too high for tanners to keep positive margins at current leather prices, they are of two minds for the reason the market is so strong. On one side, some traders are of the impression that tanners made lots of money when the market was down and are now willing to give some of the money back. Tanners on the other hand maintain this is not the case and the main reason they are in the market at today’s prices is they do not want to give up market share in an overcrowded tanning production environment so those short of stock must buy.
As one tanner emphatically put it: “When the hide market was down it was down for a reason—leather business was in the dumps.” He maintains that in order to do business and keep or increase market share during these times, they had to quickly lower their prices to levels that sometimes meant losses. This said, there were probably some tanners with locked-in leather contracts who made out well at the bottom of the hide market, but not everyone did.
One of the largest dilemmas currently facing US hide and blue suppliers is shipping. On top of sky-rocketing rate increases, suppliers are dealing with a serious lack of shipping capacity and irregularity of steamship service. Today packers, traders, processors, and tanners are finding it increasingly difficult—some say nearly impossible—to find containers and book shipments. In addition, many bookings are cancelled at the last moment and given the current environment, suppliers are not able to promptly reschedule. The present state of shipping is not only becoming increasingly frustrating for suppliers, but customers as well are expressing aggravation as they are being caught short of hides and blue.
The following excerpt from a report compiled by The Agricultural Transportation Coalition (AgTC) is from someone in the hide and leather industry and puts the shipping problem in perspective:
“Just this week one of our main carriers cancelled 17 of our bookings at the very last moment. These were bookings that we had made four-to-six weeks in advance in order to secure the space we needed in order to make our regular shipments with [that carrier] to our clients. This now brings [that carrier’s] cancellations of our bookings to 20, which covered the export shipments of 75 containers in total.
“As you know already, in the current shipping environment, it is nearly impossible for us to replace these space reservations with other carriers at the last moment as most are also completely full and also returning empty equipment to Asia.
“What is happening to us now is even more disastrous. With our inability to make these export shipments, our clients are now unable to produce their products from our shipment of raw materials. This in turn causes our clients to be late in their deliveries to the factories producing the consumer goods. If our clients are late on their end, one or all of the following situations will occur: they will have to pay a penalty for the late delivery; they will have to pay the additional high expense to airfreight the product to the factory; or they will have the order cancelled altogether for late delivery.”
The unreliable and costly shipping problems are attributed to a lack of steamship capacity created by the removal of containers and vessels from service when the economy faltered last year. Now that import and export business has picked back up, shippers have been slow to return shipping capacity.
The impact of limited shipping capacity goes beyond poor service; it has also been responsible for huge increases in shipping costs. Hide suppliers indicate that costs have increased by over 30% and more increases are on the way. One processor will see a $250 increase per container to Asia this April and another reported price increases of around $1000 per container since prices began escalating. With 650 hides in a box, that pushes Cost and Freight (C&F) charges up by around $1.50 per hide. What makes the problem particularly troublesome is that increases come at short notice and hides are often sold on a C&F basis before notice of a rate increases.
According to a representative of the US Hide, Skin, and Leather Association (USHSLA), the association is actively pursuing actions to resolve these shipping issues; however, resolution is particularly challenging to US suppliers because the shipping carriers are not US-owned or -based. The topic is expected to be a major point of discussion at next week’s USHSLA Board of Directors meeting in Washington DC.
AgTC is also actively involved with the Maritime Commission, Congress, and ocean carriers to resolve the issue. Next week, meetings are scheduled with the US House of Representatives and the Maritime Commission. Several US hide suppliers are members of the coalition.
This week’s slaughter expectations are approximately 621,000—close to last week’s slaughter of 617,000. (Source: Urner Barry survey of industry participants).
The JPI reached a 52-week high last week, peaking at $65.11. The $52-week low occurred last May when it bottomed at $21.11. The three-year JPI chart shows the market ascending 208% in nearly a straight line between the two time periods. Another point the chart illustrates is the current market level is in the same range it was for most of 2008—before the market crash at the end of the year.
As with all markets, at some point the hide market will stop rising. The question is when will it stop and will we see a correction at that point? For now at least, sellers seem confident it will not be before the Asia Pacific Leather Fair in Hong Kong at the end of the month. The hide market is typically strong preceding the fair and it will often soften following; however, this depends on how leather business does as tanners transition from high season to summer production. Also an important factor, lower slaughter levels experienced this year will tend to hold prices.
Share this story:
