US Perspective--23.03.10
23/03/2010
Courtesy of www.thejacobsen.com
This past week the hide market continued to be very firm. One of the reasons people give for this strength is the global reduction of cattle slaughter. Week after week, we hear of reduced kills in regions such as Australia, the US, Europe, Argentina, and Brazil—with seemingly no end in sight.
In The Jacobsen industry-related news section this week, a couple articles point to a reverse in direction from contraction to growth with Brazil cattle slaughter. On March 17, we provided a link to an article reported in the Meat Trade News Daily forecasting Brazilian beef production and exports to rebound in 2010 by 4%. Although the industry is still facing lower availability of finished cattle for slaughter, the situation is beginning to change with demand boosted by higher export and domestic demand for beef. Reinforcing this position earlier in the week, on March 15, the Meat Trade reported that China is expected to reopen its market to Brazilian beef later this year. This followed a ban which started in 2005 due to an outbreak of foot and mouth disease in Brazil.
If indeed this increase comes to fruition, a 4% slaughter increase in Brazil will not significantly impact the global supply of hides estimated in the 250,000,000 range. What is of more importance to hide markets is this may be a sign that the declining hide supplies, prompted by the poor world economy, is beginning to show signs of life as economic conditions improve.
Slaughter at 616,000 this week is down 2,000 from the same period last week. Last week’s estimate was originally reported at 621,000 but was reduced to 618,000 when Saturday’s kill was revised from 19,000 to 16,000. Slaughter for the same period last year was 618,000.
As the week has unfolded, the market remained firm with hide prices up in many cases a dollar from last week. Some suppliers—with an abundance of caution—have expressed willingness to take a little less money from customers who have proven reliable in the past, indicating a nervousness that the market has reached its peak. The volume of sales appears to be down with buyers and vendors showing restraint. Some speculate a certain amount of hides are being held back for the Asia Pacific Leather Fair in Hong Kong, beginning March 29. A number of people have already left for Asia to visit customers and tanneries ahead of the show.
USDA export sales for week ending March 11 look quite similar to patterns we saw earlier this year. Sales for the week for combined whole hides and wet blue are 531,002, falling very close to the yearly average of 535,610. Combined shipments of hides and blue are 588,500, up 23,460 from the year’s average of 565,040. Total yearly sales and shipments are 5.356 million and 5.65 million respectively, comparing with the year’s slaughter of 6.316 million.
Wet blue shipments for the week turned in at 123,800—slightly behind the yearly average through Week 10 of 132,600. Wet blue sales of 64,900 were down from the yearly average of 117,400. There were several downward adjustments to wet blue grain split sales, amounting to 13,549 pieces. These were primarily in China (8,933) and Japan (2,122). Whole hide sales last week also had adjustments—resulting in reduced net sales by 23,490. These were mostly from China (9,398) and Mexico (6,912).
Some suppliers have indicated they are much better sold than appears from their inventories because they cannot get enough containers to keep their product out flowing. (See World Leather Business Week, March 16). It is difficult to know the impact, if any, the freight issue is having on the overall shipment numbers this year.
Looking at aggregate hides and wet blue 2010 year-to-date sales and shipment numbers, total sales through Week 9 are 4.829 million while shipments are 5.061 million. On the surface, this does not support the hypothesis that the lack of boxes has significantly held back shipments.
If freight problems are backing up inventory, there is a possibility that carry-over inventory from 2009 is being held up. Unfortunately, there is no statistical clearing house that maintains a census of leftover hides and wet blue.
People grappling with this question often look back to previous year’s slaughter and shipments to estimate inventory build-up or contraction. In 2009, slaughter was around 32.4 million against shipments of nearly 32.5 million. Adding a small domestic consumption of 1.1 to 1.2 million brings the total shipment and consumption to 33.65 million, reducing inventory in 2009 by over a million hides. Although we know the ending 2009 inventory was down, we still do not have a handle on what that total inventory was. Even if you go back to previous years, there is no way other than guesstimating what the starting point is.
In the marketplace, sticker shock comes to mind when one considers the reaction of tanners, shoe manufacturers, and shoe brands to the current hide prices. Tanners are now facing the daunting task of passing along significant price increases to leather buyers. In order to cover recent hide price increases, industry pundits have estimated finished leather prices must increase from $0.20 to $0.25 per foot. Understandably, tanners are apprehensive that they will be able to pass these prices along.
In terms of shoe prices, a source indicates that the sum total of leather price hikes translates to $1.25 to $1.50 a pair for the spring of 2010. The brands are in a state of shock with obvious concerns that retailers and customers will not support these prices.
One point to keep in mind is alternative materials can replace leather components and manufacturers and brands will closely look at this as they try to keep costs in line. At some point this will have a dampening effect on leather demand and hide prices.
Kills this past week are forecast to be 618,000 according to an Urner Barry survey of industry participants. This is somewhat steady with last week’s 621,000.
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