What happened this week: In our opinion things are starting to get more complicated. The problem starts from the bottom of the quality end and ends at the top, where it is far less pronounced. The fast rise in hide prices is affecting the different sectors of the leather pipeline in totally different ways. The low and medium price sectors are suffering most because margins in this field are traditionally low and financial leverage is very high.

Present raw material price levels are not allowing profitable margins and with the production season ending and the cheaper stock effects fading, tanners and manufacturers are starting to review their positions and to make budgets for the next season. The results are simple and easy to find. Without a sharp rise in leather prices, adequate declines in raw material prices or an extended added value chain there is little chance for any profitability for the second half of the year.

Since there is still some time before decisions need to be made, business activity is slowing down and most of the players have shifted towards a hand to mouth and minimal buying attitude. The dynamic of general optimism has been fading for some weeks and the buying bonanza, where all that was offered was picked up, has disappeared. At best it has changed to a wait-and-see and a minimal activity mode. This is also owed to the fact that in this segment, with the upcoming change of season, nothing is really safe yet; neither the volume of orders nor the prices.

This is slowly starting to put a hold on the one-way market trend and tanners are no longer accepting every offer made and every price asked. The confortable sold-forward position of most suppliers and their endless optimism about further rising prices is taking any measureable price pressure off the market, but if there isn’t a larger round of business soon the pressure and uncertainty could return.

For luxury leathergoods and automotive leather the situation is different. Seasonal fashion influences are far less pronounced and both sectors share filled order books and a pretty clear picture about their (high) demands of raw material for the coming months. Margins and/or the added value chain are better or longer and the financial strength of the players is better than in the normal commodity field of upholstery and shoe leather. This is creating the opposite situation; strong competition for the 'right' raw material with quite limited alternatives. The logical consequence is rising prises.

However, this doesn’t solve the problem we mentioned in a previous report. More money does not create more supply. So buyers should actually analyse their market segment carefully now to check whether a 'plan B' should be discussed in case money cannot solve their problems. For the time being, prices for high-quality light and heavy material continue to rise with an extremely low level of volume.

Trading activity for the week was relatively light.  For dairy cows and other standard material this was because tanners refused to pay asking prices and for the top quality end it was because of limited supply and/or offers. We were able to book a few sales, but only because of long-term relationships with clients. Prices were barely steady for dairy cows and only with the assistance of the US$ were steady revenues in euros achieved.

For the few heavy bulls available we got some premiums again, but we can’t say that we felt comfortable with it. But there is no option considering the prices that have to be paid at the abattoirs. There is no question that we are actually trading in the danger zone now and prices have finally lost any foundation. This can of course happen and last for a while, but it is increasingly changing the parameters.

The kill: The kill remains pretty low and again the missing males are making the situation difficult. There is no indication that beef demand will change soon. Quite the reverse, in fact; one has the impression that the low domestic prices for beef from bulls are supporting the live export of cattle at the moment, and that’s why we are missing them.

What we expect: For the coming week we can’t foresee any changes. Time for decisions is getting closer and we remain cautious for standard items while the end of the quality list remains well protected.

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