What happened this week: The typical summer markets are starting to develop, in Europe at least. In Germany some regions are commencing their school holidays, particularly in the north. Week by week now until August more federal states will be going on holiday and this will affect beef consumption, bringing down the slaughter to the lowest levels of the year.

At the same time, European tanners are closing up for the summer. What starts in the north will shift quickly to the south in the coming weeks. At the present levels tanners are not too keen to build inventory, so most are just buying hand to mouth; the absolute minimum to fill the drums before the vacations. So far we cannot trace any significant activity for the period after the holidays.

Most of the EU tanners are trying to use the summer production break to build pressure against the suppliers and see this as the one and only chance to reduce raw material prices to levels they can work with. The fact is, however, not many stocks are building, but it is only end of June. So we have quite a few weeks ahead of us where the slaughter levels will be low, but if the demand is lower stock will start to pile up. Most sellers are pretty well cleaned up prior to the summer holidays, but we aren’t seeing too many forward positions.

Due to the continuous rise of abattoir prices month by month, few sellers had the courage to build sizeable forward positions into the summer. At the price levels we have reached it could become pretty risky and painful when the summer is sunny and hot. In some cases prices are already in retreat. Officially, sellers are holding out and are defending the present price levels, but in almost every EU market there are grades that already discreetly sold well below the official levels in the price lists.

While many are interpreting this as a weaker trend we would not agree yet. Why? Well, simply because at certain prices below the market there are still enough buyers around to clear whatever needs to be cleared. For us this is a signal that tanners still need hides and have to, or are willing to, take them if prices are adjusted to workable levels. As a result, trading is rather hand to mouth, but this is still enough to keep too much pressure from building in the market.

It is interesting and important to note that automotive tanners have been particularly stiff. Despite all the good news from the German premium car manufacturers and their large order books, the margins are negative and where is the fun in working at full capacity and losing money? So, after having been the market locomotive for so long they have dug their heels in and put a cap on the market. The higher prices which would have been the consequence of the recent abattoir prices have not been accepted and this segment of the industry has clearly signalled this month that they are not willing to follow the market anymore, at least for the time being.

So almost everyone in the tanning industry in Europe is now using the summer break to try to push prices back to increase or regain profitability again. So it will be a very interesting six to eight weeks as we all know that by the end of the summer raw material stocks need to be replenished and decisions for the next season need to be made. Since leather prices are not moving any higher there are only two options left, as we indicated some time ago. Either more players in the tanning industry will go bust, which will reduce demand, or raw material prices will fall to keep leather competitive in the market and enable most tanners to return to profitability. 

As far as real and physical market activity was concerned, the week was pretty uneventful. Bids came in and were far below market. Serious buyers were willing to improve in the end, but if one was willing to sell it meant that lower levels had to be taken. The decline for low grade material was about 10% while cows needed smaller adjustments for smaller quantities. This suited us as well as the buyers as nobody wants to take market risks.

Interest from Europe was for prompt shipment only, while Asian buyers were looking for end of July shipments, which fits well with Europe which will be at the height of holiday season by then. We think and hear that price concessions of varying amounts had to be made everywhere this week if one was willing and interested in selling product. The optimists will have kept their hides and the pessimists will have taken what was available in the market.

The kill: The kill has started another descent. With the holiday season starting in the north, numbers are falling and will continue to decline for the next four to six weeks. Only in mid August do we expect a recovery, so the supply side will not create any additional pressure for the market. Weights are very light too, so again it is a poor season for hide processing.

What we expect: We maintain our cautious position. We can’t see any upside potential in this market and it is questionable whether the hand to mouth buying will increase in the coming weeks. Tanners need levels to be down by around 10% and will do their utmost to force the levels down. Sellers will have not much option; they will either have to take moderate declines or hope for better times later on. Fundamental changes will most likely take time.

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