German Perspective—13.04.10

What happened this week: The week after APLF in Hong Kong was, as usual, reasonably quiet. People always need to sort their meetings out and sometimes the return home also has a sobering effect.

The trips to Hong Kong or to Asia in general brought some enlightening information and also clarified a number of unknown factors. The reason for the unbroken strength we experienced in the market over the last few months, particularly during the first quarter, was quickly explained. The shoe, handbag and automotive industries have constantly had to increase their budgets because of better-than-expected demand.

This might be less to do with demand and more to do with the seasonal company budgets, which are normally made up to September and tended to underestimate demand levels before the orders came in. This triggered continual revisions, so the purchasing departments have been constantly running behind. Domestic demand for leather products in China was so strong—even at higher levels than the export contracts—that good inventories were absorbed much more quickly than expected and many tanners had, with the economic success of 2009, the courage to reinvest in new raw material purchases.

The results are all pretty well known. The market is back to levels seen during the second quarter of 2008. Since leather prices are way below the equivalent levels, in the Western world at least, the windfall profits from the excessively low prices of 2009 are now melting away, even for those who had the courage to buy large raw material stocks in 2009.

We still have to deal with the given facts and that means that high grade, light material, in particular, is in short supply. A number of outstanding leather contracts for the winter season are not fully covered and tanners are not finding adequate raw material in the market anymore. This is less a matter of price than of availability, so solutions using lower selection or other materials have to be found. The sharp gain in sheep and lamb prices confirms this.

In automotive the situation is mixed. Some brands and markets are found to be well and running above budget while others are struggling, particularly because of the raw material prices. Since the pockets of most of the players are reasonably deep it is not being felt too much yet.

We remain sceptical about the situation in the upholstery sector. Orders are not really satisfactory and leather prices are not representing the present market situation at all. Domestic demand in China had been good and in combination with the cheap raw material prices in 2009 consumption in China was good, but today’s price levels for quality hides in this sector are producing significant losses. Although few have been willing to accept it, upholstery tanners have been underperforming for a while and are now announcing production cuts. This had been covered up by the demand from bag leather tanners, but they alone will not be enough to sustain the market for dairy cows.

Despite the firmer US$, further price rises at the abattoir door are no longer justified, in our opinion, and in all optimism we don’t think they can be passed on to the customers in full.

Trading this week was light. This was partly because of the reduced offer list and partly because of very limited follow-up trades after Hong Kong. Prices were about steady or a fraction higher due to the better US$ rates.

The kill: The kill was small because of the Easter holiday. The biggest problem is the extremely low proportion of males in the slaughter mix, which is creating part of the market problem today.

What we expect: We think that the coming weeks will be decisive if the market digests the price levels. Supply will continue to dictate and until the orders for the current season are covered the fundamental strength will not fade. However, for the coming season, decisions have to be made and a fundamental change in the material mix could change the pattern. Supply and demand have to be balanced again. Non-existent hides can never be tanned to leather, whatever the price paid.

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