Market Intelligence—30.11.10
30/11/2010
The past two weeks have been pretty turbulent. After the US had been in the focus of the market for some time, the radar screen has shifted again back to Europe. The debt crisis is back. Ireland was next and Portugal is poised to follow. The situation in the EU is becoming increasingly complicated at the moment. With a second country (in addition to Greece) now needing assistance, concerns are growing. It is not only a problem of bubbles and bailing out banks, but also a structural issue with nations spending constantly more than they generate in taxes. This is nothing new but has been overlooked for ages, or obscured by structural investments or subsidies from the EU. However, in most cases it hasn’t led to any solid economic infrastructure, but either to investment bubbles (Ireland) or to uncompetitive industrial infrastructures, an exaggerated public service and consequently government overspending (Greece, Portugal). The markets see now the dramatic efforts the governments are making, but a discussion remains about whether these programs might create even further and bigger deficits, with countries losing consumption and investment for the future.
While in Ireland many have welcomed the offers of external help, others, like the Greek citizens earlier in the year, were not particularly happy with the conditions the government had to accept to receive the EU support.
The core countries in Europe, with Germany at the forefront, developed quickly and positively after the deep crisis of 2008. Falling unemployment, rising tax income and saving programmes quickly saw their economies recover. Thanks to a strong industrial base with products desired by the emerging markets, their industries are thriving on exports. As good it is for these countries, things are bad for the rest of Europe. It seems it will take years until the countries in crisis get back on their feet and the gap between the ‘good’ and the ‘bad’ is likely going to widen. There are two conflicts. On one side, many people in the ‘supported’ nations don’t appreciate the regulations and conditions set by the EU and the ‘rich’ are blamed by the poor, while on the other side the taxpayers in the stronger countries don’t appreciate the possibility of having to pay for the excesses of others. This conflict is old, but is becoming a serious threat now to EU stability. Politicians know that pretty well and are having a tough time explaining to their voters that, for the sake of the unity of Europe, certain decisions have to be taken. So, the problem is not just economic, but also psychological.
The markets have reacted quite intensively. As much as the dollar fell when the US problems were the centre of attention, so the euro has taken a beating in the past weeks. It lost at some stage another three or four cents and a large part of the September slide of the dollar has been wiped away now.
Commodities were mixed. While ‘safe haven’ items like precious metals held pretty well, others, including oil, remained pretty flat. With oil production remaining high, even financial investors were not so keen on investing more in crude oil. The markets are also watching carefully the action of the Chinese government, which is now starting to control the expansion of the economy with more care and is also starting to take measures against sharp rises in the price of basics such as food. This could possibly mean a moderate slowdown of industrial activity, but it could also mean that higher food prices will leave less money to spend on other consumer products.
Market intelligence
The raw materials market in the past two weeks has remained in the same tight trading ranges that we have already seen for quite some time. However, the footing is firm and the sharp decline of the euro has also supported European suppliers and markets again. EU hides have become competitive again and the overseas buyers are back on the bidders’ list.
The US market continues to sell well week by week and prices over there are incrementally marching higher; while everybody involved is enjoying that, no one is jumping or bouncing yet.
From the leather markets there is almost only good news to be heard. Order books for shoes are full all over and some manufacturers are already talking about exhausted capacities. Here and there certain shoes are quicker to sell than they are to re-produce. Temperatures in Europe have been low pretty early in the winter and so the replenishment of winter shoes, gloves and also jackets (if they are made from leather) has helped. It may also be the case that people remember last winter and want to be prepared now. The latest news from the premium automotive manufacturers is pretty much the same. Big sales so far in 2010, some will even reach record levels and full order books. Most of the German brands will try not to close over Christmas and get their workers to the factories even in the traditional holiday week between Christmas and New Year when most factories prefer to remain closed.
The China boom continues and also some other emerging markets are performing pretty well as far as private consumption is concerned. There is hardly a cloud in the sky of leather consumption towards the end 2010 and preparing for 2011. It would be the easy way just to take this all for granted and to predict nothing but rosy skies for the future. Well, as usual we like to look at other possibilities too.
The main question we would like to raise is once again if more demand converts into higher prices. In the case of leather and leathergoods we would need inflation or increases in consumer prices first. At the moment we are dealing with the situation that a lot of other costs are rising and that manufacturers are trying everything to compensate this by lower or steady prices for leather at least. We have discussed this already in a previous issue of the Market Intelligence report. There are many ways to keep material prices under temporary control. Reduction of quality, reduction of quantity and last but not least substitution, as well as productivity gains or other cost reductions. There are still many ways to escape from price pressure at least until inflation takes command.
Tnext question is if the demand for leather will persist. Looking at the economic problems in the US and in parts of Europe, it’s clear that not everywhere the world is in good order. We were talking about the great order books many manufacturers enjoy, but at the same time we are speaking to an increasing number of manufacturers who are at least beginning to think that their present performance is also only the result of past budget controls. That means that as a consequence of the 2008 crisis the supply chain has been consistently undersupplied. With this, in combination with a positive outlook from consumers, it is possible the pipeline could be filling up on budgets that might now be too positive after having been too negative before.
Finally, we have to ask if the local crisis in Europe could be the beginning of another fundamental global issue. The truth is that we are not just dealing with a small local crisis. If the problem is not resolved in Greece, Ireland, Portugal and possibly Spain the stability of the whole of Europe will be in question. Although the focus is not on the US at the moment, the US economy is not free of problems yet and it’s not yet clear if assets bubbles can be avoided or controlled by the Chinese government. This is not just a problem for the leather pipeline, but the leather pipeline has frequently proved to be an early indicator.
Even considering the above, one cannot be pessimistic about the short term. For the medium term however, there are enough good reasons to watch and monitor carefully to see if any of these things could become a factor.
The first quarter is normally still a busy time and demand within the leather supply chain is at the highest level of the annual cycle; this should bolster demand for the next months. Most players are convinced that the tanning industry is buying hand to mouth and the inventory situation is low, which will force the industry continuously to replenish stocks. This might be true, but it also means that the industry is either not so convinced about the long-term outlook that it is willing to build stocks or it is already building stocks to enable it to resist rising prices in the weeks ahead by refraining temporarily from purchases. In any case the market situation remains very fragile and nervous.
With the exception of a few niches the market has been in balance for a long time. In a perfect world such balances could be maintained for a long time, but in the leather pipeline the beef industry and the leather industry operate totally independently and any assumption that the balance can be sustained is against all market logic and experience. So, sooner rather than later the market and its participants will decide what their serious expectations are and take the relative decisions that will destroy any balance quickly. So far, it doesn’t seem that the industry pipeline is flexible enough to handle short-term fluctuations, in particular on the supply side.
On the supply side the global production seems to be at pretty stable levels. Higher levels in some regions are offset by declines in others. The first quarter sees generally lower kills in the northern hemisphere and?as already mentioned?high productions levels. Everything points in the direction of more demand than supply. A normal reaction would be rising raw material prices. Either because the demand is higher or people expect demand to be higher. Despite the present fundamental firmness in the market there are no fully convincing indicators so far and we are still of the opinion that this is down to price-resistance for finished leather. It doesn’t seem that tanners are willing to make a bet yet on higher leather prices in 2011, which could tempt them to invest in raw material today and at the present price levels., with the quality segment a possible exception.
At the more commodity end, substitutions for leather are dictating the prices for the ‘real thing’. Slowly but surely consumers are getting used to alternatives, whether they like them or not. In any case it is very difficult today for the normal consumer to determine the difference in the shop and then the price counts.
People who can afford the real stuff feel and see the beauty of the original and are willing to pay the price asked. Hardly any quality manufacturers are complaining about business. If they complain, they just mention that the raw material quality is not good enough any more and they can’t get hold of enough adequate raw material. Well, what they complain about is actually what is making their business. Only what is scarce is prestigious, but this is for another issue of our publication.
The split market is seeing further strength. The search for alternatives and the strong demand for shoe leather is allowing certain splits to be seen as an interesting alternative for the production of specific leathers. In particular in China we are hearing about rising split prices and strong demand. This is pleasing grain leather tanners who are finding a better return for their splits and consequently better value for the hides they are buying.
The skin market is also still firm and even the recent Eid-ul-Adha festival did not ease the supply problem even though it triggered large slaughter in the Muslim world. It seems that these volumes had already been worked into the budgets because most suppliers are still reporting strong interest. This might be not just a quantity but also a quality issue, since the types of skins produced in some Muslim countries are not exactly what the market is asking for. Still, a lot of skins are produced in a very short time and this has not really had much effect on the market so far. It is also true that the price rise has come to a halt for the moment; despite good demand, prices are steady. We think that skins are now pretty well valued and don’t believe that prices have any further room to increase, with the exception of niches and specific qualities at the top end. A negative factor is also the correction of wool prices last week. The high returns for wool have in our opinion been one of the triggers for rising skin prices, at least for those types where the wool recovery is a determining factor.
For the coming weeks it seems that the market will remain on a pretty solid footing. Prices will stay stable and sellers might even try to push prices higher. There have very little to lose being well sold forward or in balance at the moment. We doubt, however, that tanners in their majority will accept any higher prices at this stage. In Europe tanneries are busy, but preparing for the end of the fiscal year, while in Asia the hand-to-mouth buying should continue. This is too little momentum to push prices. The recent recovery of the USD has taken a lot of pressure now from the European markets and if the rise of the dollar and weakness of the euro continues, we might see prices in euro testing to see if there is a bit of room on the upside. They should find some support in China, but the rest of the tanning industry doesn’t seem to be willing to let prices move higher in the current year. We think the market in these last weeks of 2010 will remain at a steady-to-firm level. At the same time we think a careful analysis of needs and expectations into 2011 is advisable.
Share this story:
