German Perspective—08.06.10

What happened this week: In the end there was nothing really new this week. Buyers’ and sellers’ opinions and interests are drifting further apart and both sides are now trying hard to position themselves for the coming weeks. Buyers are bidding aggressively down and sellers are hard at work defending their positions.

Fundamentally the situation hasn’t changed much. While for upholstery-related material (cows) buyers seem to have the upper hand, one has still the impression that hides for shoe and automotive tanning are still need in decent volume so that sellers can still control the market with minor adjustments, if there are to be any adjustments.

The automotive industry in Germany is particularly enjoying strong export demand, which is easily compensating for the flat conditions in the domestic market. This has led to a constant demand for specific automotive hides, which we have seen all through 2010, but does not solve the massive problem of margins, and tanners are presently discussing ambitious price increases for their existing contracts. However, the problem is whether any rise in leather prices would actually be enough or whether better revenues would simply continue to propel raw material prices higher.

As much as the price rises are needed, some buyers are concerned that it could just lead to a donkey and carrot problem. If one player gets more he will be more aggressive in the market, which will hold until others decide to follow. Consequently, this market segment continues to be pretty tricky and does nothing to solve the problem of hides simply being too expensive. This problem needs to be resolved either with higher leather prices (which could cause the problem discussed earlier) or, eventually, lower raw material prices.

For the other more commodity types of hides produced in Germany, the situation seems to be a bit different and the two-fold market situation persists. Lighter-weight bulls and cows are struggling in the markets with all their competing origins also trending lower. For these categories the real market level is presently anybody’s guess and for these grades the opinions of buyers and sellers are drifting far apart. Sellers are seeing the strong performance of the heavy material and believe that demand for the other items will also return after the traditional slow period in spring and early summer.

Here we can see a lot of conflicting opinions and positions. While some would be willing to let the market slide to find new and healthy levels, others are still trying or willing to hold levels, a move that is really only pleasing the abattoirs. In the end it all will depend on whether the tanning industry is willing, and in a position, to pay the prices, but it doesn’t look too likely, so it seems some people are wasting their time.

In Europe the market is somewhat manipulated by currency. The euro continues to be weak against most currencies and has been challenging the 1.20 level against the US$, what is cushioning some of the market pressure on European hides. All in all we think demand is easing and in particular export traders who are focusing their business on Asia clearly realise that the easy game is over.

Behind closed doors, most of the trade is discussing how prices at the abattoirs can be adjusted. The problem is that reductions of 10% for bulls and 20% for cows are the minimum needed to bring prices back into line with international market levels. Let's see if the trade has the courage to tell the slaughterhouses the brutal truth about the market realities. The biggest problem continues to be that the slaughter industry is not willing to accept the massive difference between the performance of the various grades.

Sales this week were slow again. Trades were isolated and more coincidental. Heavy bulls are still finding homes for all the production while all the other grades are struggling. We would say that demand is far less than supply, and we continue to believe that the forward positions for cows are eroding or have already eroded. Some might have been wise enough to take orders for July already, which will make life a bit easier for them.

Prices were a reflection of the market. Heavy bulls aren’t getting what they need, but they are holding their levels pretty well. All other items were seeing low bids and only a few were good enough to be accepted in the end. The currency market was again an important factor and with some patience it was able to help the calculations. However, the hide business is no fun at the moment where margins are concerned.

The kill: The kill was bit better this week, but should one be happy about it considering the prices that have to be paid at the abattoirs? Beef business still doesn’t seem to be good and abattoirs are not having a particularly good time either. For the next week we do not expect major changes. We are now entering the normal lower summer cycle.

What we expect: The fair in Guangzhou did not offer price increases for leather and this is why we think the market is still in correction mode. It would be better to have the correction sooner rather than later because leather demand is still there. Bringing price back to workable levels would quickly normalise the business.

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