German Perspective—14.09.10

14/09/2010

What happened this week: The week after the All China Leather Exhibition in Shanghai turned out to be quiet, which wasn’t really a surprise because people were mostly either still travelling or returned home and got busy working on the results of the trip or clearing up the backlog of work on their desks. From the buyer’s side it was pretty much the same; while Asian tanneries are still sorting out their orders and business outlook, the Europeans are waiting for the shows in Düsseldorf, Milan, Paris, and finally Bologna to get a clear reading of their future in the season to come. After the dust has settled a bit and the Asian tours have been digested it seems that there will be two main consequences. The first is that tanners are not optimistic about obtaining any more money for their leather and, secondly, business continues to drift for top-quality expensive leathers or cheap and easy products. This is nothing particularly new in this but it is making the lives of tanners more difficult all the time. It is hard to find raw material that is cheap enough to produce acceptable quality at an acceptable price, while on the other hand it is difficult to find top-quality raw material too. The good material is too expensive and not good enough while the others are not cheap enough to meet the market price levels. While over the summer the supply was commanding and made it possible to get more money for raw material than it was actually worth, it seems that the wind is starting to change a bit.

There is nothing serious with the orders for leather still enough to prevent raw material stocks from seriously pressing on the market, but buyers are stubbornly withdrawing from buying when prices are are not moderately adjusted. Also interesting was the strong demand for low quality, low price items seen over the past weeks, which brought grades and origins that had not been on the agenda for some time back into play. We tend also to believe that more general concerns about the situation of the industry are building up. Even a good order book and all the attempts to paint everything positive cannot prevent problems as has been seen by the necessary demand for suspension of payment by a well reputed smaller upholstery tanner in Scandinavia. It was the second prestigious name in the region this year that had either to close or to look for creditor protection as a result of the sharp gain in raw material prices, which were exhausting financial resources quickly. We can only hope that more don’t follow. With consumer demand in the old economies remaining still pretty flat, a number of governments feel that further stimulus programmes are needed to put labour markets and consumer spending back on track. The outlook still depends predominantly on consumer demand in emerging market, especially China. This is encouraging retailers and brands to open more outlets there. We think this is another confirmation of the trend to either luxury and expensive or commodity and (very) cheap, which reflects the consumer pattern in China. Since the leather business has often been a reliable indicator of general trends, the fading enthusiasm seen since the middle of the summer could be an indicator again. No collapse, but rising concerns and realism, just cautious attitudes at this stage. As far as sales are concerned, the week was rather moderate. A few bids came in but they were only acceptable in a few cases. We mainly saw buyers trying to see if there were a few bargains to be found. At the abattoirs a bit more realism seems to be taking place and the summer magicians seem to have accepted that illusions can be entertaining for a while, but cannot be a substitute for reality in the end. So, it seems that the road is paved for a start of the adjustment to market levels. Prices for the few lots trades were steady with a bit of support by the gain of the US dollar rate.

The kill: The kill continues to be good, but we are not yet fully happy with the weights. In particular dairy cows are still below the seasonal norms. The rising cost of animal feed could have further impact on the kill later this year when farmers have to bring their animals back from the fields.

What we expect: We believe that the fundamental pressure on prices will persist but with limited influence on market prices. However, rising kills and further buyer resistance might build up more pressure week by week. We still think that about 5%–10% below the present price levels there is a solid basis that would not threaten existing leather prices, but at the same time would allow the industry to return to better margins and to gain stability for any possible obstacle ahead. How much adjustment can be expected will also be related to the abattoir prices in the coming months.

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	€ 1,50	Weakish
	30/+ kg	33,5/35,5 kg	27/+ kg	29/31 kg	€ 1,40	Steady
Bulls	25/29,5 kg	27,5/28,5 kg	22/ 27 kg	25/26 kg	€ 2,00	Weak
	30/39,5 kg	36,0/37,0 kg	24/34 kg	31/33 kg	€ 1,90	Weak
	40/+ kg	45,0/48,0 kg	34/+ kg	38/40 kg	€ 1,70	Pressure
Thirds	15/+ kg	25,0/27,5 kg	13/+ kg	24/26 kg	€ 1.10	Steady
Thirds bulls	30/+ kg	38,0/40,0 kg	24/+ kg	33/36 kg	€ 1.20	Pressure

German Perspective—14.09.10 - leatherbiz: Lea

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German Perspective—14.09.10