German Perspective—25.01.11 - leatherbiz: Lea Leatherbiz

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German Perspective—25.01.11

25/01/2011
What happened this week: The week developed differently from the general sentiment. The sentiment was totally bullish while business was pretty slow. Well, one should not generalise too much. There is no question that the market for heavy and good quality male hides remains firm. There is just not enough supply to satisfy the present needs of tanners. Shoe upper tanners and automotive tanners are competing again for the same or similar product, as in the best times in history. What is killed in adequate material is, for the time being, not enough to match the short-term demand of the industry. The supply and demand situation is quite clear. Other hides which are also side-leather related have decent demand although the market is not as short-supplied?also due to more options. Cowhides become ever more fashionable for shoe upper leathers and in China in particular, producers are willing to consider them for side leather purposes, because they are a cheaper alternative. Fundamentally we are in a crucial market situation. On the supply side we have problems in Australia and Korea where the supply is interrupted or reduced due to floods and foot and mouth disease (FMD). In many other parts of the world the kill is also below normal levels, which is not helping either.

With the massive price rise for higher quality material, the interest is starting to shift to lower quality alternatives in an attempt to secure profitability. The constantly rising prices of raw material and the persistent supply issues are creating an explosive environment between buyers and sellers at the moment. Those buyers who have the financial resources, the confidence and the order books are still investing and absorbing what is offered.

No matter what people actually believe about the future of the leather business, the essential question still remains as to whether leather demand and prices will rise enough to justify the present level of raw material prices. The limit needs to be tested when demand is really falling as a result of the price levels reached. Until now, even with rising prices, sales have been enough to clear production, and order books for leather are still large enough to ensure that the raw material finds a home. There is no question that the present raw material prices have turned production margins negative, but demand has not yet retreated enough to balance the offer and supply yet.

The benchmark of prices is still determined in dollars so the recovery of the euro has possibly had a sobering effect on the enthusiasm of trade in Europe. Almost a 5% raise in the value of the euro in the last few weeks might have destroyed some of the great hopes some people had for prices. One must not forget that 5% today converts to EUR3-4 per piece and some of the calculations made at the beginning of the month might look pretty wrong today if one was betting on a falling value of the euro and a rising market at the same time, despite the rise of the market seen in the meantime.

Prices may be firm, but in dollar-terms they are rising incrementally week by week and the currency is far more volatile than the hide market itself. As firm and strong as the hide market might look today, there are not really any steep price rises. Sellers know about the dangerous territory we have reached and buyers?as much as they need the product?are not willing to take a big risk on stocks. This is part of the problem at the moment. Supply and demand are not buffered by inventory anywhere at the moment and the raw material demands that need to be covered in the short-term, week by week, are still enough to absorb the kill. Again, we have to assume that the imbalance of the situation can only be sorted out with financial resources or, if that is not the case, a sharp decline in the demand for leather for price reasons. Other than that little has changed. Upholstery tanners are those who suffer most, luxury items are still in strong demand and are keeping prices up for top-quality materials, automotive is having a good run and the supply side is contracting further, shoe production has a low leverage in leather consumption and enjoys an empty pipeline, and the general problems of the global economy are fading more and more into the background.

Debt crisis? What debt crisis? However, watch out. Inflation is up, food is getting very expensive and energy too. The world isn’t the same as it was a year ago. Sales this week were only good for males. Prices were higher for males and just about steady for females.

The kill: The kill was a bit lower, but to make situation even more difficult, the kill for bulls was sharply lower and the kill for cows sharply up. It seems that the price for live cattle leaves no alternative and some beef is substituting pork at the moment, which has fallen in demand and prices due to the dioxin scandal in Germany.

What we expect: Even if nobody wants to hear it, we are convinced that we are now starting to enter dangerous territory again. It might look pretty bright, but the problems of rising food and energy prices will hit the leather pipeline as well. Finance will become an issue as ever before. It might be a bit early to worry, but it is always better to be prepared. The empty stocks limit the risk. The next weeks will be slower due to the Chinese New Year holidays, but at least a pause in the trend?except for goods and heavy material?would not surprise us at all.
Type Weight range Avg. green weight Salted weight Avg. weight salted Price per kg green weight Trend
Ox/heifers 15/24,5 kg 22,0/23,5 kg 13/22 kg 20/21 kg € 1,95 Steady
  25/29,5 kg 27,5/28,5 kg 22/27 kg 25/26 kg € 1,80 Steady

Dairy cows

15/24,5 kg

22,5/23,5 kg

13/22 kg

20/21 kg

€ 1,75

Steady
 

25/29,5 kg

27,5/28,5 kg

22/27 kg

25/26 kg

€ 1,65

Steady
 

30/+      kg

33,5/35,5 kg

27/+   kg

29/31 kg

€ 1,45

Steady
Bulls 25/29,5 kg 27,5/28,5 kg 22/ 27 kg 25/26 kg € 1,95
 Steady
  30/39,5 kg 36,0/37,0 kg 24/34 kg 31/33 kg € 1,85
 Firm
  40/+      kg 45,0/48,0 kg 34/+   kg 38/40 kg € 1,55
 Firm
Thirds 15/+      kg 25,0/27,5 kg 13/+   kg 24/26 kg € 1.30
 Steady
Thirds bulls 30/+      kg 38,0/40,0 kg 24/+   kg 33/36 kg € 1.30
 Steady



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