US perspective - 20.04.2010
The Jacobsen Commentary and Market Opinion – 20.04.10
Courtesy of www.thejacobsen.com
The market was very quiet on Monday with no sales reported. The hide market continued to be slow on Tuesday as everyone tried to figure out positions and the market’s direction. A few people were out there kicking tires, but there was very little trading.
Trading picked up a notch on Wednesday, with one sale of medium HTS and BS and one heavy HTS pushing prices into higher territory. Both the medium sales traded for $74 dollars while the heavy HTS jumped to $78. All other sales were steady, falling within the previous week’s trading range.
Thursday‘s market was fairly quiet for a Thursday with only a limited number of sales reported. Prices held steady falling within the past week’s trading range.
The market ended the week with a fair number of sales reported. Once again, prices were mixed with the majority within the week’s trading range but a few new highs were achieved. The new highs included a native bull for $64, a NHNDC for $60, and a small packer for $50.
Questions raised
This year we have seen a remarkable rally in the hide market sparked by resurgence in demand for leathergoods and a modest reduction in global hide supplies. Improvements in the world’s economy (China’s 2010 first quarter growth is at 11.9%. US first quarter GDP is projected to be 3.5% to 4%) helped contribute to rebounding the hide market from its crash in 2009 to today’s prices, nearly approaching record levels.
Since last April, there has been a 200% increase for heavy Texas steer prices; a fair reflection of the other high-end hide selections. This is somewhat understandable when you consider the improvements we have seen in this year’s economy and growth areas such as emerging markets. However, if you take into account actual production, sales, and shipments for US hides and blue, the picture becomes a bit murky.
Over the past three years, the slaughter, sales, and shipments numbers do not have a consistent, logical relationship to hide prices. During the first 14 weeks in 2008, sales and shipments were at or over that year’s slaughter and HTS were $64 on April 15. For the same period in 2010, slaughter numbers are higher than the previous two years while sales and shipments are lower. Meanwhile, prices are up.
This illogical relationship between slaughter, sales, shipments, and prices in 2010 has caused some people within the trade to question the reliability of the USDA data.
In the US, reporting of export sales and shipments for hides and wet blue is mandatory. Although there is a possibility that some sales and shipments may have slipped through the cracks, this is unlikely to be happening on a grand scale for a couple reasons. For one, there really is no incentive for that to happen. Second, the industry is not very large in terms of the number of companies who report to the USDA and for the most part, there have not been any major changes in the makeup of players.
This is a major puzzlement for those of us who are trying to decipher the behaviour of the hide market and we will certainly be spending more time in the future trying to fit the pieces together.
Estimated slaughter or the week was 632,000, 16,000 more than the previous week’s estimated slaughter and 24,000 more than during the same period last year. Earlier in the week, industry participants in the Urner Barry survey projected the average weekly slaughter at 623,048.
Hitting the deadline
Thursday was a ‘special’ (and for many a dreaded day) day in the US, the deadline when everyone has to pay their yearly federal and state income taxes. The economy as a whole is showing signs of improvement but with mixed results; businesses profit and the stock market soars yet unemployment continues to remain a huge problem.
On Wednesday the Dow Jones Industrial Average ended the day over 11,100 when just a year ago it hovered in the 6,500 range. Claims for newly filed unemployment climbed to 485,000 for the week ending April 10, jumping 24,000 in the last week.
Looking at the hide market for the past year, it has more closely followed stock equities than US employment. Yesterday, HTS medium weights averaged $72, which is up an even 200% from $25 the same period last year. The charts below show HTS for the past 12 months.
In Thursday’s USDA export sales and shipments report, once again both combined whole hide and wet blue sales and shipments fell short of weekly slaughter of 616,000. For the week ending April 8, hide and blue total sales were 611,600 and export shipments were 546,000. This year through week 14, kills were 8,797,000 while whole hide and blue sales were 7,863,595 and shipments were 7,974,000.
The general mood
The tone in the market continued to be firm with slightly less enthusiasm than was expressed last week. Most people maintain that prices will not retract for some time. Availability of hides was mixed with heifers starting to show up. Regional shortages on certain selections such as northwest cows are helping to keep prices up. One source noted that some packers appeared to be offering large volumes in certain selections, but they have limited or no availability on a few others such as HNS and HNC.
During the previous week, hide weights became noticeably lighter, with the change happening very quickly this season. This possibly contributed to the heifers that have appeared on the scene with more being pulled to increase steer load weights.
The tug of war continues between hide suppliers tanners, and leather buyers as the market stretches through the peak season for branded shoes. Leather demand has been better than expected for shoes being produced for the autumn and holiday seasons. From the tanner’s perspective, this situation is not good as they spill red ink and struggle through commitments of leather sales at prices too low to cover hide costs.
Sources indicated that leather price increases in the works at the moment are much too small to cover hide price increases. These increases were in the $0.10 per foot range, which does not even come close to covering the gap created by exponentially higher raw material costs.
The difference between hide prices today and last November, for instance, illustrates the nature of this problem. Today prices for steer hides delivered into China are in the $80 range. In the beginning of last November when leather sales were made for this ongoing shoe season, HTS prices were $53 FOB or $60 C&F. The difference between hide prices then and now is $20, which equates to nearly $0.45 per square foot on a 45-foot hide.
As tanners complete their obligations and begin negotiations for the oncoming shoe season, many expect there will be some serious repercussions in the market. If leather demand continues to be strong, leather buyers will have to pony up and pay increased prices to cover hide cost. If not, tanners will have to cut back. The shoe industry will most likely continue to squeeze and not cave in easily. In the long run, we may see alternative manmade materials playing a larger role.
