German Perspective—12.10.10

What happened this week: We have seen the same pattern as in previous weeks. Global speculators are using excuses to bet against the US$ and the greenback has been under severe pressure. The world’s discussions about the risk of a currency war with the Chinese continued against any realistic valuation of their currency. So we are back in times of high uncertainty and risk for normal enterprises.

The market continued to be affected by the currency fluctuations as well as by the coordinated attempts of key accounts in the tanning industry to bring raw material prices back into line with the  present levels of leather prices and to ease the margin problems. Although it needed a trigger to work up the courage to act, the tanning industry in Europe is really smart. It is not focused on aggressive price bidding, but is making smart moves to scare suppliers through moderate and controlled production cuts and by making clear hints about the threats of negative cash-flow many have been facing for a while.

The trade has responded, and with the kill season ahead a number of suppliers who were rather bullish some weeks ago have become pretty dovish now. A number of tanners are reporting that they are strongly pushed to book contracts for extended delivery times and a number of suppliers are willing to take forward positions until the end of the year—with reliable customers in the Euro zone.

At the same time there has also been a decent amount of interest noted, particularly from China after the holidays. This explains how the world is organised at the moment and how the leather business is ticking over at present.

In Europe the market-dominating heavy, male and fresh grades are presently in abundant supply and prices are too high to attract any buyers outside the base. It is not the same situation as in early 2009 when these hides were cheap enough to attract almost every buyer in the world. Consequently, there is little risk or chance that overseas buyers will buy into the supply and become competitors for this specific material.

Our hides had, for various reasons, been out of the price range and are now correcting back to normal levels. The correction, or what we think is a correction, is now in place, and as usual the reaction and the opinion about the market is very mixed. Some believe it is a new longer trend of lower prices and have possibly also been caught with stock. They are trying to get rid of their material and in some cases are willing to book for longer periods to protect themselves. They are the present market makers. Others believe this is nothing more than just a hiccup and are not too happy because they now have to wait and hope that it will not be too long before the market recovers.

All the information about leather demand was positive this week. Orders and the outlook for the consumption of goods made from leather remains strong. The problem continues to be the price. In the Western world, inflation is not an issue and price competition is not allowing for any higher product prices. Consequently, rising material prices are being answered with lower material consumption or consumption of lower-grade material.

The situation in China is a bit different because consumption there is strong and many are expecting a rise in inflation. This has been reflected in the optimism of Chinese tanners that leather prices for domestic consumption will rise for the 2011 seasons at the latest. This explains why we believe that for the moment our market is only in a correction phase in a bid to readjust and that future trends will depend more on the movement of alternative origins and the currency markets.

For the moment the price pressure is still being answered by an escape into cheaper raw materials or alternatives, but not really by a decline in demand. Chinese tanners are pretty easy on substitutes and are readily using cows instead of bulls for shoe upper leather.

The risk of excessive tension in the global monetary system and possible bubbles could turn into another crisis eventually, but until then no real or fundamental market threat can be expected. So far our market has done what it needed to do and corrected a great part of the overvaluation. There might still be a bit to go, but the main move has been made.

Sales during the week have been reasonable. Demand came from all over, but the majority was for low grades and dairy cows. For bulls, tanners decided just to do hand-to-mouth business. Prices fell moderately and in a controlled manner. The big automotive tanners played the game with reduced intakes and controlled payments without any aggression, letting the market slide rather fall and maintaining the supply pressure.    

The kill: The kill has eased a bit. Warm weather, high cattle prices and stagnant domestic consumption are weighing on the kill. The big packers involved in export business are running higher numbers. Hide weights have also fallen again, so we are not really seeing the normal pattern for the season. While the days remain warm we don’t expect any real change.  

What we expect: This week will entirely depend on the results from Lineapelle in Bologna. The EU market is still affected by financial problems and the upholstery trade is still lagging. On the other hand, production of luxury items and shoe uppers is busy and, with the declines in the raw material market, are already on a positive track. Anything can happen and until the conclusions are drawn we believe that a moderate pressure on EU cattle hide prices will persist. In addition, currency and the performance of the Chinese market will lead the way into the autumn.

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