Market Intelligence—13.07.10
13/07/2010
First of all we would like to congratulate the new World Cup champion Spain and all the fans who were hoping for and dreaming about this success. All other teams we thank for an entertaining month of football although one can assume, that some great expectations have been disappointed pretty early. Anyway, in 2014 we are going to start again. In the meantime we have to look for something else to do in the evenings.
We still find the situation on the financial markets pretty directionless. Positive news is followed by negative news, statistics that try to prove that the global recovery continues on track are followed by forecasts that assume the double-dip scenario. However in one respect everybody is in agreement. The key to the trend still lies in China. Overheating economy or solid trend, this is what the whole of financial society is discussing and both scenarios have strong supporters.
We have seen two months of shrinking retails sales in the US. The labours market have offered some mixed impressions while in Germany the labour market has shown enough strength to make people hope for an EU recovery after all the disastrous news we have had from this part of the world in the second quarter. We should also not believe that the debt crisis is already history.
As a consequence the euro rebounded sharply, by almost 5%, and saw levels of $1.27. Less risk aversion had also let the price for gold moderately decline. Oil bounced up and down with no clear direction in the economy and US oil stocks also being up and down. However the range of $70–$80 for the barrel remains intact.
Market Intelligence
During the summer it is less exciting to think about reports dealing with the leather pipeline. The World Cup, high temperatures around Europe and the beginning of the holiday season are holding market activities down.
The price level we have reached for raw materials does not make it at all attractive for tanners to think about long-term procurements for their production. This might exclude some of the big commodity manufacturers who have almost no option and need to secure the raw material product flow to feed their productions.
In the past two weeks most of the market activity was focused on the US market. Obviously some larger pieces of business had been concluded. This was further confirmation that in general the demand for leather continues to be stable, not to say good, and manufacturers are for the time being willing to focus more on stable production and high levels rather than to cut production and to look for better margins. Not all will agree with this position and would point to the fact that there are more and more rumours coming out of Asia saying tanners there are cutting production because they cannot see any profitability in manufacturing.
In our point of view this seems to be limited to the tanneries that are not firmly tied into the supply chain and have still the option to decide on how much and when they will produce and at what capacity they will run their facilities. Apart from the fact that for many tanneries the production of leather is not profitable, we are hearing more and more stories from China that the government is focusing strongly on pollution control again. This means that in some areas where smaller factories are operating, production volumes are at this moment reduced because tanners want to see first how serious the efforts of the government are going to be. Being right in the summer season also in China it is not such a big problem for the moment, but it is putting some people into severe difficulties over their purchasing and production plans from September onwards.
This is not affecting large enterprises so much, those that are manufacturing for export orders, but it is hurting substantially businesses that are manufacturing in particular for the domestic market in China.
The good news is presently coming mainly from the automotive industry. While in Europe car sales are pretty much down other manufacturers of exclusive and luxury automobiles are enjoying very good if not their best order books in a long time. It is a bit of a contradiction, because one would have expected a slowdown of car sales also in China and the US since the outlook for economic development in both markets is not totally safe or reliable. From China more and more information is suggesting that industrial production is starting to slow down and the government is also restricting the influx of liquidity into the market. This would normally decrease the demand for luxury products, but for the time being none of the forecasts seen from luxury product manufacturers are indicating any expectation of a decline.
In the US the recovery is definitely not stable. The financial statistics are delivering some positive news every week but there is negative news too. The solid recovery of an economy is definitely something different. However, whatever we see from the general status of the global economy it seems that it doesn’t really affect the private consumer market much. Those people who enjoy reasonable wealth seem still to be in the position to spend money on items one doesn’t actually need to survive. This is all good news for the leather industry, although we all know that there can be large gaps between plans and final consumption. Anyway, for the time being there is no reason to expect that production and consumption in the second half of 2010 should be substantially lower than what we have seen in the first half of the year.
We have dealt with this subject already a number of times, but it seems to us that a lot of manufacturing along the supply chain at this moment is not profitable and if one looks at the prices for raw material compared to a year ago everyone can see how much finance is needed today to keep production running at full capacity. As long as the order books and monthly invoices remain high and steady the old rule that growth is financing will apply. However any interruption or dip could quickly create changes and problems. The problems in business do not originate from simple supply and demand conditions, but much more from financials. Even if people feel that we are too negative, we remain on high alert for the next quarter and will watch carefully. It would be good if trouble could be avoided. It is more likely that we are going to see the classic ‘survival of the fittest’.
Coming to the survival strategy and indications of who and where the casualties can be expected, we tend to believe that ‘big eats small’ and side leather tanners have better chances than upholstery ones. In automotive, integrated productions will have a better chance than single tanners and global better than regional. Niches in the top luxury segment seem to have decent potential for the coming months.
As far as regions are concerned it seems, that the restructuring process in Europe, in particular for upholstery tanners, has not yet really started and we have to expect that this sector in Italy will be hit most. We might get away with not too many big bangs because there is still a lot of room to reduce production capacity by shutdowns of contract tanning facilities.
In Asia we still believe that there is a lot of potential to reduce production capacities with trading companies reducing their market and production activity. Many of them are also just using contract tanning options and are not real industrials. If it is true that a lot of them have already reduced their market activity it is due to high raw material costs. Consequently the restructuring will not be determined by the classical bankruptcies, but could become a much quieter process.
As far as the market activity was concerned in the last two weeks, trading was said to be reasonably light in Europe and saw some waves of action in the overseas origins. As mentioned above the big boys need to make sure that their supply chain is decently filled and we think that large deals are being done on levels that are some percentage points below the officially quoted prices. The big packers and the big manufacturers continue to be smart enough to keep the balls rolling and not let the entire world share the price levels for the big deals.
Although many are claiming that business in upholstery hides was much less active than for side leathers we have heard about a surprisingly decent volume of trades in dairy cows. Upholstery tanners like to make sure that they have at least a bit of raw material under their belts for the time after the summer holidays. A little bit of vitality has also been seen from tanners making bag leathers; they will also have been reasonably active in the dairy cow market. So some of the pressure which we have seen in spring for this classical type of upholstery raw material has definitely been lifted and the lower kill in Europe, which is pretty normal for the summer months, is also limiting a bit the supply side.
In the split market we saw a bit of mixed emotions. In Europe there has been a reasonably high output of lime splits due to the strong performance of the automotive tanners, but one could hear here and there about isolated problems to place the volume produced. For standard wet blue splits we are still hearing of reasonable interest in particular for products with fine fibres as well as other specialities such as heavy substance. However, this market segment is feeling the low season and this is unlikely change in the coming weeks.
Skins are definitely a bright spot at the moment. In most of the dominating supply origins people are talking about very strong and good demand and insufficient supply. Although tanners are still pretty reluctant to accept higher price levels they are all over the place trying to secure appropriate raw materials. We are hearing about sharp gains in prices for lambs from New Zealand which has immediately triggered rising demand for European fellmongering skins. Turkish tanners are said to show their usual strong interest for new season lambskins and it seems that the demand for double face material and shoe lining is at present far bigger than the supply of suitable raw material. Also Chinese tanners are using the summer break and good weather in Europe for their annual trips and we hear of a number of groups travelling Europe at the moment, visiting their suppliers to make sure that they are not losing any supply.
For the coming weeks we still believe there will be low key activity; in particular in Europe more and more suppliers and tanners are heading into their summer vacations. This year we are starting the holiday period with completely different situations than a year ago. In summer 2009 there was still abundant supply and inventories of almost all raw materials. Only the Chinese tanners had the real courage to commit and to buy whatever they were able to lay their hands on. In 2010 we are starting the summer season with very little inventory on the supply side and it seems that the tanning industry is also not holding excessive stocks. This means that pretty soon decisions for the next and remaining months of 2010 need to be taken and it will require courage to decide which way to go. If tanners bet on the positive trend, they should and must buy raw material, even though higher leather prices are not yet obtained. Others may be of a different opinion and believe in a decline of leather demand and consequently also in the reduction of raw material price levels into fall 2010. We have to admit that we are at this stage still totally undecided and we will monitor market activities in the coming weeks to let us have a better and justified position for the after-summer trend. Until then we wish most of our readers a nice, sunny and relaxing summer.
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