What happened this week:  This week was another good example of how emotional and irrational the trade is. Until last week, most of the sellers in continental Europe were still busy telling everyone how fantastic business was and that demand would not allow raw material prices to retreat. But another automotive leather supplier failed this week and many tanners of heavy male hides are getting pretty stubborn about prices.

The supply side is not a problem because of the higher kill and we get the impression that there are more hides looking for a drum than drums looking for hides. This is not really a surprise at this time of the year. It made discussions about new business and prices difficult and tanners got pretty ambitious with their bids. It seems that this all came as a surprise for some suppliers as they obviously never believed that the concern about margins and the financial resources would really apply to their clients and to automotive tanning in general. Sooner or later it reverts back to a 'survival of the fittest' situation.

The US$ continued its sharp and quick descent and we have seen a 2-3% rate drop each week since the beginning of September. The decline is now roughly 10 cents, which accounts for roughly 8% or, converted into euros between EUR4-6 per piece or EUR0.15-0.30 per kg. People look pretty silly when they fight for cents in the market, but only to those who don’t realise the bigger picture and the real value of the hides.

With the prices in alternative markets not really picking up, the gap, which has existed since the summer, has been widening and most of the European butchers and hide sellers have been happily ignoring it. As usual, the wake-up call is pretty painful. Some of the people who supported the current high prices have suddenly become pessimists this week and are saying they fear a second economic crisis.

There is absolutely no reason to move from one extreme to the other. The market crash of 2008 was related to the collapse of the financial markets, which caused demand in the pipeline to be interrupted rather than stopped. It is pretty much the same now. There is no problem in terms of demand, only in the valuation and prices and consequently in the margins and cash flow, particularly for Central European male hides. The price gap has existed for a while but in spring and early summer it could be justified because of the low slaughter and reduced average weights.

This sometimes has to be accepted on a temporary basis, but it could not be ignored forever. Taking all this into consideration, the market for males had led to an excessive need for correction. Most sellers and butchers refused to recognise this, so instead of a controlled slide and correction for the benefit of all, the situation has ended abruptly with reports of bankruptcies.

Sellers are suddenly becoming scared and buyers are suddenly gaining the courage to push for significantly lower prices, which would allow them to return to the profit zone. Sharp moves are never good for the market situation, although in this case they might have been necessary to finally convince the market. Modest and soft attempts for adjustment have failed so far so the shock therapy was obviously needed to sort things out.

Trade during the week was influenced by this situation in Europe, while the Chinese were mostly preparing for their holidays. Interest for hides was still there and there is still no fatigue in the side leather and automotive market, albeit at a price. Selling this week meant either biting the dust and suffering because of the constantly falling US$, or taking less in Europe in euros. As the week progressed, the problem increased and it took good and fair clients to agree to acceptable trading levels in order to keep the ball rolling.

In the end nothing has really changed. There are tanners who are still busy and need to procure raw material, but many now have the courage and intention to claim their rights and buy hides at levels they find adequate. Sales during the week were better than one would have expected, but only at discounted levels, which depended on the day and on individual clients. Overseas prices in US$ were almost steady or even a fraction better, but suffered from the fall of the US$. Prices in Europe came down by 5-7% for males, but depended on the levels paid before by the individual customer. 

The kill: The kill remains pretty good. Export prices for beef are still reasonable and in some markets even very good. If butchers buy the cattle and have export connections the situation should be reasonably profitable. We are now entering the high season of killing, so supply should be acceptable for a while.  

What we expect: Basically we have nothing to add to the opinion we have been voicing for a while. Hide demand is good at a fair market price. We have now made a first and good step and are more than halfway to what we think is adequate. If the next step at the abattoir doors can now be made we have a good chance of seeing a quick stabilisation.

On the condition that the US$ does not make any more significant moves we should come back to pretty solid and workable levels. Any attempt to exaggerate on either side could be problematic and could prevent stability and reduced market volatility from occurring. It will be interesting to see whether this will happen quickly or slowly. The fair in Bologna will certainly tell us more.

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