Market Intelligence—21.09.10
21/09/2010
After the long summer break the markets are trying to return to something like normality. However the general pattern hasn’t changed much.
Investors are still seeking security, which is pushing up the prices for precious metals. Good news from the Chinese economy took some of the concerns of the investors away and money was returning into metals and even oil. The price for a barrel of oil went back into the trading range between $75–$80 with mainly financial investors returning to this investment class.
New concerns about the strength of the US economy and good news from the German economy lifted the value of the euro again and concerns about the debt crisis in Europe are fading at the moment. This might be only temporary, but for the time being investors like euros more than US dollars. After the massive gains of the Japanese yen versus the US dollar the Japanese national bank finally decided to use interventions to reduce the value of the currency. Since the firm yen is penalising Japanese exports and the value of the currency had been hitting record highs the action had become almost inevitable. This still leaves hanging the question of who is investing in the Japanese yen with all the structural problems the country still has.
Stock markets are bouncing up and down and investors are still not very sure what they want to do or if stocks today are a good investment for the future.
Consumer confidence in the US declined against all expectations and demonstrated again how vulnerable the outlook of the US economy is. Economists do not have a good feel at the moment for the mood of the people in the streets.
How uncertain investors remain can also be seen in the continuous rise of gold, now followed by silver. Whether there is deflation or inflation every concern seems to be covered and protected by this investment. It does not pay any dividends and is not productive; it only serves the eternal desire for safety.
Market intelligence
The market in the past two weeks has remained in very narrow trading ranges. Tanners have been been paying no more than the upper end of the price range, and sellers taking no less than the lower end of the price range for a very long time now. This supports our opinion that leather business remains fundamentally strong, which is keeping leather producers constantly in the market, but it proves too that they are not willing to do so at any price.
Present raw material price levels are dangerous, as was seen when another tanner ran into financial difficulties. A company of good reputation in Scandinavia serving the furniture and automotive markets has had to seek creditor protection and ceased payments. From what we understand it is not the result of poor business and insufficient orders, but more the consequence of the opposite. The order book was full and orders higher than budget, which proved impossible to finance with raw material prices reaching the levels they did this summer.
There are rumours, too, that automotive clients are not paying as they have contracted or are delaying payments. Higher than expected order books and leather prices that cannot be adjusted fast enough to cover the rapid rise of raw material values have created a lethal cocktail.
The question now circulating in the trade is if this is only an isolated case or if there might be others in a similar situation who are set to follow. While the big players might have enough financial resources to handle the situation there are some smaller players who could be threatened. One can only hope that the automotive industry has seen the writing on the wall and will now quickly finalise the price negotiations that are still pending with their leather suppliers. Many manufacturers are still not in a position to confirm that talks have finished yet.
In this environment one cannot be surprised by new rumours of mergers and acquisitions in the automotive supply industry. Many of the suppliers would rather try to build new alliances today than tomorrow to get into a better position with the automotive industry. If, even in better times, suppliers are not permitted to establish sufficient prices, what will than happen when the industry enters a new downward trend? It is better to be well prepared.
Small ticket items and luxury products are still performing well. The Le Cuir À Paris exhibition (September 14–16), which is focused on this segment, saw mostly satisfied exhibitors. Also here price is an issue, but manufacturers are much more concerned about raw material supply. There is just not enough suitable raw material available to meet the demands of brands and consumers. The endless demand from the emerging markets, the Christmas season and the return of bonus payments in the financial industry are all keeping demand high and with a limited supply of top-quality raw materials, concern is more about resources than price. Luxury brands are much better off than their counterparts in the automotive industry.
There is not much news from the shoe business. Retailers are expecting a strong season in the winter and this is good news. This is also reflected in the production levels of side leather tanners around the globe. There is no question but that this market is price sensitive. This explains why raw material prices are still facing strong barriers. The magic $80 mark for US steers has been holding for months now and every attempt to push prices higher has failed so far. The pain of negative margins is still strong enough to prevent tanners from paying more. This is also the result of the stubborn position of leather buyers when it comes to suggestions of price increases for finished leather.
The situation in the shoe trade has been extremely consistent and shoe consumption is rising globally. Even in markets with flat consumer conditions shoe sales have outperformed and consumption has been higher than in 2008 and 2009. The financial crisis of 2008 just stopped product flows for a short time, but consumption and sales only suffered congestion for a short time. Additional demand for leather in standard shoe production has been held back by raw material prices and this has led to the substitution of leather. Looking at the arrivals in the stores one can easily recognise what has happened. There are more shoes than ever before that are made from artificial materials; where they are not completely made of PU materials, there is a combination, with designs reducing the amount of leather in the mix.
We complain about every shoe that is not made from leather, but we have to accept the fact that there is hardly enough raw material available to satisfy the total demand for shoes. If it is not because of a lack of volume then the price consumers can afford or are willing to pay is the barrier. We have to accept a certain proportion of non-leather materials in production. In this respect however, consumers should be better informed about what they are really buying. There are buyers who are totally convinced, that they have bought a leather shoe and are totally surprised when they learn that their shoes are in fact made of plastic. To make sure, that leather is recognised and fetches a decent premium a bit more than small, hidden icons in shoes to highlight the materials used should be offered to consumers to help them make their purchasing decisions in the shops. It is time shoe brands began to use clear markings on their shoes and to think about a separate presentation in the shops for plastic and leather shoes.
We know all the arguments, that it is not possible to find standard definitions, it could become a threat to the prices of non-leather shoes and so on. However, it might also represent a fair chance for those companies and brands to separate themselves from the commodity market and to try to qualify their offer as a premium product. It would be an interesting project to understand what consumers today really think and what they are willing to buy, if they understand and notice the difference. To us it would not be a surprise if the young, fashion clientele would not bother much about the material. As long as it is hip and in fashion anything sells. A look at the feet of teenagers in canvas shoes across the globe is just one example, the colour and look of football boots made from plastic is another and there are many more.
The consequence of the above is that for the time being raw material prices have their defined limits. They can temporarily be exceeded to meet seasonal demands, but the limits are still set and alternative materials can in most cases provide the balance if demand for finished products exceeds the supply of adequate raw materials at a certain price.
We believe, that the above is the reason why the raw material market continues to fluctuate in very close ranges. Strong demand is preventing any significant decline and the price limits for consumer products are keeping the cap intact.
The split market is as tightly ranged as the hide market. Consumption of collagen is still rising and so the demand for bovine split remains steady. Higher production of leather is meeting rising demand in the second half of the year. Splits for the leather industry are benefiting from the price issues we discussed above. The trend for either cheap or expensive products is supporting the demand for economic raw materials such as splits. Some brand names are actively experimenting with splits at the moment and a number of shoe models are out already using even long fibre, rugged low-quality parts of splits as a fashion gimmick.
The market for lamb- and sheepskins has also found its level now and here price ceilings are working well. Possibly only top-quality large merino skins are outperforming, but all the other items seem to be levelling out and the wave of demand seen in Shanghai seems to have slowed down a bit after sellers tried to test the market with higher prices.
We still fail to sense any reasons or triggers that could change the market pattern in the near future. The balance between supply and demand seems to be almost perfect and we are waiting for the inevitable change of the market pattern. We still have a number of fairs in front of us between now and the end of October and at that point we should also know if our concerns regarding the financial resources of some tanners are justified. However, for the coming weeks any fundamental change seems unlikely.
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