What happened this week: No matter how people want to look at it, there is no question that activity continues to slow down from week to week. There isn’t a total blockage of sales and leather business hasn’t come to a halt, but most tanners are covered well enough to play the game of wait-and-see in an attempt to bring raw material prices back down to earth and to levels that are profitable again.

Fundamentally, not much has changed. For dairy cows and standard materials the above applies and we are even quite convinced that the first stocks are starting to build in some warehouses. For veal and heavy males the situation is still shortage-driven and this is protecting sellers’ positions and might also leave them with the impression that the slowdown for the others is only a temporary and seasonal break.

This key question is whether the present decline in demand is just the normal seasonal slowdown. Are tanners only holding out as long as possible because of the high prices? Is there no incentive to replenish inventories now and will they return quickly when stocks have eroded, or is this a real downturn in demand, particularly for upholstery leather?

Tanners in the main markets such as China and Italy are strongly pretending that it is a decline in demand, but it is certainly too early  to judge whether this is actually the case or whether it is just an attempt to squeeze raw material prices back during the low season. To us it seems to be, as usual, a combination of both.

The low season is certainly a factor, but in China, particularly, the government credit policy to slow the property market down seems to have had a significant effect on furniture demand in the mainland. This has slowed the demand for dairy cows in China since mid April and the outbreak of foot and mouth in Japan and Korea might have saved the cow market from an earlier correction. One way or another, the prices for cows in Asia have drifted lower and only a lucky hand on the currency market this week prevented this from spilling into the European market in a severe way.

In any case, abattoir prices for cows are far too high today and the falling weights of the season are adding to the problem. The male market is still commanded by the heavies for the automotive industry. Weights well below 40kg are finding it hard to justify their present price levels and, compared with other European markets, German bulls for the shoe leather industry are starting to look overvalued. They were competitive in terms of quality and yield for a long time and the weak euro has protected them from price pressure lately, but with the moderate adjustments seen in other competing markets the hides have slowly priced themselves out of the market. Only the very low kill provided shelter from more headwinds.

The stories we are starting to get from China regarding an increasing number of quality issues are also interesting. They don’t surprise us at all, as in the firm trend seen during the past few months many names that are famous for bending the rules when the market is in the sellers’ favour popped up again. While on one hand this is not acceptable, it is always strange that there are buyers around who still believe in miracles and listen to the ever-repeated fairytales instead of properly checking who they are dealing with. Anyway, it is positive for the regulars and cycle by cycle more people are learning.

The opinions of buyers and sellers are starting to drift further apart. While most buyers believe now that we have passed the peak and will now enter an extended slide in the market until the autumn, sellers are only ready to accept a smaller correction and adjustment of prices. Most are excluding the option of a correction of more than a few percent. Sitting in Europe, people should not forget that the currency has, and will continue have, a major influence. Without the sharp decline of the euro, our hides would be far more out of the market already and a larger correction in euro terms would already be on the way.

Sales this week have been harder work than they have been so far this year, but in the end long-term relations paid off and what needed to be moved was taken by the regular buyers in view of these relationships. Prices were steady for males because European tanners take what is produced, while sales of females were based on relationships and not on the market. Prices were slightly down in US$, but the strong performance of the dollar mid-week protected euro revenues better. However, prices for cows are down $3-4 from their peak.

The kill: The kill remains low. The percentage of bulls is particularly small in the slaughter mix. We can’t find any reason why numbers should increase at this time of the year.

What we expect: We still don’t think the market has found a secure basis yet. Demand is there, but tanners can’t afford the price levels. The fair in Guangzhou next week will give indications as to whether leather prices can move further up to support the market. If not, more correction seems to be inevitable.

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