German Perspective—20.07.10

20/07/2010

What happened this week: The main event of the week was the sliding US dollar. What was helping exports and business until some weeks ago has now turned again against exporters and if we believed that German hides were overvalued then, they definitely are today. For international standard products such as dairy cows, heifers and bulls up to 40 kg we consider the prices today to be at least 10%, or in some cases as much as 15%, away from market levels. This has nothing to do with demand. Except in upholstery we see most tanneries still working at full capacity; the hype in the automotive industry and the steep fall in the value of the euro until mid-June gave many the impression that the prices for German hides had found one direction since 2009 and this would be an never-ending story. Apart from the pretty short-sighted market view of a number of players, hardly anyone is really making a fair value analysis and the deals of the day camouflages for them the real situation and the question of how the market is going to move. Unfortunately the German market is also suffering from political moves at the abattoirs and this has the effect that players are ignoring the market facts.

It is far more important to get hides at this moment rather than how much they cost. Low kills and the news about the fantastic export business of the German car industry are making people believe that this is just a limited summer pause and not a break of the trend. We doubt that because it would consequently mean that alternative origins would need to rise by the equivalent valuation gap and this means 10–15%. With the stiff resistance we see all over to break the magic marks such as $80 for US steers hasn’t been successful so far. Talking to many tanners we get the same story. Footwear, leathergoods and automotive tanners are not complaining about orders and production levels, but the vast majority are saying that more production creates more losses. For upholstery tanners the situation seems to be different in that respect; they do not have a choice of producing less if they want to. For them hides are too expensive and orders not enough. The question is how much of the monetary reserves built up in 2009 are they willing or able to burn to safeguard the business now. This is fundamentally another proof that larger profits in the leather pipeline are borrowed rather than made. Being more or less midway through 2010 and having reached raw material price levels that are reasonably high, the industry has become pretty cautious about the next six months. While some believe that sufficient leather prices will be obtained and support the raw material market, others are more questioning of the general global recovery and believe that the boom of the recovery after the deep crisis is now rolling out, demand is going to fade, the huge government stimulus programmes are either ending or losing their effect and consequently raw material prices will adjust on the downside to the consumer price realities.

All of this is a question of favouring either the inflation or deflation theory as discussed in the media and by economists. Neither helps anyone in the trade when they have to take short-term commercial decisions.

Although trading and demand were light this week and more effort is required each week to convince buyers to act, the market as such is still safeguarded by low production and pretty empty warehouses. So far all hides that are produced are being sold. Tanners are not backing totally away from the market and sellers have not been brave enough to hold onto stocks in the second quarter. This has kept the first stages of the pipeline pretty well cleaned up and suppliers are—from the inventory position—pretty stress-free going into their summer vacations. This does not, however, mean that hides are trading at sustainable levels.

Business during the week continued to be rather spotty. We find it increasingly difficult to obtain asking levels and so we surrendered where we found it advisable and accepted moderate price concessions. There was no broad-based interest and so we had to take some isolated decisions for reasonably limited volumes of cows and bulls.

The kill: Well, we had a pretty long and cold winter and it seems that we will be rewarded with a pretty hot and hopefully long summer. Temperatures remain very high and outside animals are set to suffer from sunburn this year. The kill is terrible and this Friday a number of slaughterhouses even decided not to open up. Holidays, the hot weather and poor export business are causing butchers a lot of trouble too. The weather forecast remains good and the holidays have just started, so little can actually change now. Supply will remain pretty poor.

What we expect: As one can get from the above, our enthusiasm remains limited until we see higher leather prices or competing raw material origins showing a very strong price performance. Currency will remain a strong factor, but from the demand side we don’t expect anything supportive for our market at the moment. Since the supply is also low, the lethargic market will most likely stay with us for some more weeks.

Type	Weight range	Avg. green weight	Salted weight	Avg. weight salted	Price per kg green weight	Trend
Ox/heifers	15/24,5 kg	22,0/23,5 kg	13/22 kg	20/21 kg	€ 1,90	Steady
	25/29,5 kg	27,5/28,5 kg	22/27 kg	25/26 kg	€ 1,75	Steady
Dairy cows	15/24,5 kg	22,5/23,5 kg	13/22 kg	20/21 kg	€ 1,70	Weakish
	25/29,5 kg	27,5/28,5 kg	22/27 kg	25/26 kg	€ 1,45	Weakish
	30/+ kg	33,5/35,5 kg	27/+ kg	29/31 kg	€ 1,30	Weakish
Bulls	25/29,5 kg	27,5/28,5 kg	22/ 27 kg	25/26 kg	€ 2,00	Pressure
	30/39,5 kg	36,0/37,0 kg	24/34 kg	31/33 kg	€ 1,90	Pressure
	40/+ kg	45,0/48,0 kg	34/+ kg	38/40 kg	€ 1,70	Steady
Thirds	15/+ kg	25,0/27,5 kg	13/+ kg	24/26 kg	€ 1.10	Weaker
Thirds bulls	30/+ kg	38,0/40,0 kg	24/+ kg	33/36 kg	€ 1.20	Pressure

German Perspective—20.07.10 - leatherbiz: Lea

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German Perspective—20.07.10