Market Intelligence—14.12.10
14/12/2010
After all the turbulence of earlier periods, we were actually surprised at how quiet the financial markets have been in the past fortnight. The risk and fear of a spread of the European debt crisis and negative effects on the global economy have been fading. This is even more impressive since nothing to solve the problem has been decided and European national governments are still discussing and fighting hard for the right way out.
If the euro is a reliable indicator of the real situation, then the problem must have really eased a bit since the European currency stopped its descent and was even able to recover slightly over the past two weeks. The media reaction to the recent descent of the euro has been quite impressive. It had been at a rate of $1.17 earlier this year and today we are trading at rates around $1.30 against the US dollar so there cannot be anything to worry about for now.
On a global scale the experts are starting to discuss development of the main economic regions in the world. What we have seen within the businesses for some years already is now making the headlines and the old economies have to accept that the emerging markets are now developed enough to run their own cause and are no longer totally dependent on their overseas clients. The historical cycle of the thriving and falling of nations and societies seems to repeat itself. In every region there are different reasons and different circumstances. Meanwhile Europe is fighting the integration process of different cultures and different economic set-ups in the various member nations and the United States is focusing mostly on itself and is still struggling to accept that its leadership position is fading faster than ever before. At least in our opinion the US seems to find it difficult to understand how much the world has changed and to define what its real position is going to be in the decades to come.
The publication of the Wikileaks documents might not seem to have any direct impact on the economy, but it is another example of how differently people deal with things in the various regions of the globe. For the Western world Wikileaks was proof that hardly any information is safe or secret any more, while other much stricter restrictions and sanctions in the East continue creating totally different information environments. This could and will have direct influence on the global economy as well.
From a hard facts point of view we found the recent statistics about Chinese imports and exports to be most impressive. The growth story continues; imports rose by 37.7% and exports by 34.9% in November. At the same time inflation rose sharply and even the official numbers were published at 5.1% for November. Considering that a number of prices in China are still controlled and set by the government the number becomes even more impressive. Chinese locals are reporting that they see inflation today at more than 10% for some basics such as food and garments.
With good news from China and other emerging markets like Russia, India and Brazil regarding growth, the confidence in positive trend of the global economy for 2011 has increased. Industrial commodities continue to rise and also the price of oil went up to levels above $90 per barrel for the first time in more than two years. The general mood is set for a positive trend in 2011 and at the moment the chances are rated much higher than the risks by the financial markets.
Market intelligence
The leather pipeline is now entering the final lap for the year 2010. At this stage roughly about three weeks before the year closes one gets the impression that hardly anyone is willing to take forward positions and decisions for the year 2011 any more. Those people seem to have done their homework already and are now preparing for a break over the Christmas season or preparing for the break around the Chinese New Year holiday.
As far as industrial news is concerned the last two weeks have been almost entirely positive about the year to come. Company reports expressed delight about the results achieved in 2010 and that has created optimism for the coming year, which is reflected in budgets and plans that are targeting further growth. In many cases the numbers are in double-digit territory so we are starting to exceed the sales and production levels we saw prior to the crash in 2008.
For the leather pipeline this would mean that more raw material is needed and this is making suppliers optimistic about their revenue potentials for 2011. Even those who are not over-enthusiastic have received confirmation that at least there is very little risk for any major market correction in the short term. The threat of volatility in prices is much reduced.
This fits pretty well into the reports one is getting presently from the various raw material origins and suppliers. Even the most pessimistic have changed their minds and packers and processors around the globe are not seeing any risk of a decline in the valuation of inventories for the months to come. The raw material markets are on very solid ground and for the vast majority of the people involved it is only a question of how much prices are going to rise in the first quarter rather than if they are going to rise. We have asked everyone we are talking to on a regular base, whether supplier or buyer of raw material, and we haven’t found a single person expecting falling raw material prices into the start of 2011.
The above is just a reflection of the present situation along the leather pipeline, which is reflecting strong sales at retail levels, optimism by the marketing and sales people for the next seasons and no excess inventories along the production and supply chain.
The newspapers are full of accounts of companies related to the sale or production of leathergoods growing and expecting further growth in 2011, which means that demand in the leather pipeline can hardly decline; a lot will depend on how the supply side develops.
An example of the positive outlook came this week from a PricewaterhouseCoopers study on the automotive industry. The study was published on December 8 and saw nine out of ten suppliers to the automotive industry expecting rising sales in 2011, and one-third of them expecting growth rates of more than 15%. For 2011 PwC is expecting a global sale of 74 million vehicles, approximately four million more than in 2010. The expectations for the years 2012–2015 are even better with further growth of about 5% per year.
As much as this is delivering reliable information for the short term, we have learned in the past that long-term forecasts are hardly ever right. And even PwC has said that such growth would also cause massive problems in the supply chain where rising raw materials prices could quickly become a very tough obstacle for the industry. However this is rather later than sooner and will most likely be the subject of our Market Intelligence some time in the future.
In the luxury industry expectations for the coming year are pretty much the same. Here, the established names as well as the newcomers are almost all expecting substantial growth in sales for the coming seasons.
The shoe business is also performing pretty well and after a good clearance in the last winter season, the cold early winter weather this year in Europe has again pretty much cleaned out inventories at a retail level, resulting in quick and early reorders, which in some cases can hardly be met by the suppliers.
Last but not least, leather garments are back. In particular Russian consumers are spending again and this has a very positive effect on the demand for double-face jackets. The demand for adequate raw material continues to be very strong and a lot of latecomers are now facing the problem that they could sell jackets, but they can’t find the skins to produce them. Good for those who have taken decisions early in the season and covered what they needed.
Reading the above one must be impressed that the raw material market so far has reacted so little. Prices are pretty steady and have moved only incrementally higher, if at all. While in the US raw material prices rose sharply in the first quarter, the range of price movement has become pretty narrow since then. In Europe the market was pretty much supply-related with reduced supply over the summer pushing prices high, and a high kill in the last quarter allowing the market to correct itself.
Under the present conditions, anything other than a price rise in the first quarter for raw material would be a surprise. Everybody reading our publication knows that we never get over-optimistic and we would also like now to add a drop of water to the wine so that we keep our feet on the ground.
There must be a reason why the raw material market hasn’t gone higher already. If everything looks so bright, why haven’t manufacturers had the courage to buy raw material and sellers the courage to ask for more money?
There are many opinions. The most striking is definitely the massive resistance from retailers and brands to increase prices at consumer levels. This brings us back to our frequently mentioned opinion that the real justification for higher raw material prices for leather production can only come from higher prices for leathergoods. In the luxury section, theoretically, there is more room for higher prices, but brands also like to make money and they are not shy about squeezing their suppliers or slow to substitute top-end quality or reduce the amount of leather used in a finished product. In the commodity section we have explained already a number of times that leather substitute materials control the price of leather and, with that, also the raw material levels.
Tanners have become pretty cautious about what they are doing and how much they are investing in raw material, afraid of not being covered by adequate contracts for finished product. A lot of tanneries we are talking to are still willing to cut production rather than bet on their clients paying what they need to invest in raw material. Most of the tanneries are still reporting that no matter how positive the situation may look, their clients show absolutely no intention of increasing leather prices for the season to come. This is supported by a lot of news about many brands today experimenting with cheaper material and if one looks just at the comeback of suede, it is a clear market reaction to prevent higher leather prices.
We have hardly ever seen the leather pipeline taking any significant advantage of rising prices. Leather prices have never gone up at the same speed as raw material prices and there is very little indication that this is going to happen in 2011. Rising raw material prices in this industry mean more finance, more risk and less profit, or more losses. And so the industry remains divided about what is actually going to happen into 2011. In the normal cycles of this business we are entering the high season of production and normally prices in the first quarter go up. They peak in early spring and decline or stay steady until autumn. The fundamentals this year pretty much favour such a cycle again and speculators and traders, in particular in China, seem to be betting on such a scenario.
The split market continues to be firm, at least as far as the leather production is concerned. Collagen and gelatin splits trade just about steady, but if the performance of splits in leather production continues to be as strong as it is now the consumers of lime splits will soon notice. Shoe manufacturers and other consumers of leather are checking for cheaper options and this is helping the price of splits.
The skin market continues to be the best performer. The strong demand from all skin consuming market segments is reflected in prices and availability. Hardly any skins suitable for garment, shoe linings and specific shoe productions are available and prices remain pretty high, with some suppliers even becoming strangely courageous in their asking prices. However it seems to us that the volume of business is pretty small owing to limited availability and price rises that have been too sharp and quick to give tanners any chance to follow them.
For the coming weeks the trade should be pretty much related to end-of-year operations. Some tanneries in Europe may still try to buy hides for inventory and tax reasons and Chinese tanners may look for bargains other than really try to be too active in the market. Maybe in the week between Christmas and the New Year some overseas buyers might try to check if there could be some product available when all the European tanners take their seasonal break. Suppliers will certainly not make any more price concessions in 2010. Any price changes will be on the upside rather than on the downside and sellers will certainly use the coming weeks the test how desperate the pipeline is.
Despite all the positive news and mood we still don’t believe that the global economy is totally free of risk. This coming week EU politicians will again need to discuss how to deal with the debt crisis. Even with a high number of consumers hit by problems in Europe, this is still pretty small in comparison to the number of shoppers in emerging markets. Whether stability remains in those regions is an important factor for the global economy. Even though the US economy seems to be working its way out of its deep problems, it is a pretty slow process and in particular the labour market is still far from what it should be. US shoppers have been opening their wallets pretty well for the start of the Christmas shopping season, but what has been spent now cannot spend again after the season. In China, the government is starting to work intensively against inflation and an overheating of the economy and with the leather pipeline always running well ahead of retail realities, a cautious and rational analysis of the situation at the beginning of 2011 is still advisable in our opinion.
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