German Perspective—01.02.11
01/02/2011
This raises the question of buffer stocks that could balance the gap. It seems that some producers and traders have been building more inventory than one would expect and continue to hold hides back. If this is true, the material will be either salted or wet blue and the only question is over when it will be released. Suppliers will try to cash in. If these rumours are true then it will only be applicable to a handful of suppliers around Europe and for the time being they will have little justification for taking any immediate decision.
The outlook for the kill is not positive and?at least so far?tanners’ need to buy raw material is not fading due to the large order books they still hold. Regarding the possible stocks that might have built up somewhere, it pretty obvious that most of them are in merchants’ hands. With the phenomenal success some traders?in particular in China?have had with the production and sale of wet blue, one can assume that, despite the increased price, some quantities of wet blue might still be in storage. With the positive outlook for leather demand and commodities in general it would be no surprise if players stay in the game of selling selected wet blue hides.
The logic of this business is, however, that it is rarely an all in-all out business, and usually a certain percentage of selections remain unsold as there is an imbalanced ratio of the demand for the different qualities. In a rising market this is no problem since stocks look more attractive every day, but if they don’t perform they quickly become a pain; what was looking comfortable yesterday quickly shifts to become a burden. For the time being there will be hardly any concern. The coming weeks will see declines in supply in Europe that will continue to stress the market for fresh hides even further. The problems of profitability and cash-flow remain in the background and are not influencing decisions. Rising inflation offers a chance to increase prices for leather too.
However, one can still not deny that for the vast majority of leather products the material is not a must but ‘nice to have’ material. If this logic is correct, then the gap between luxury usage and mass production will increase. Apart from the simple price question the balance between available supply and demand will become increasingly difficult over the coming weeks. We are again running towards the market making a decision on how to achieve a fair balance between raw material supply and leather production. Oversupply can be stocked, but real shortage can not be administrated. Consequently the most interesting question is if long positions really exist and if they will help the market to reach a balance or accelerate the market decline because the owners decide too late to liquidate them.
Trading activity this week was pretty light. On one side, because there were limited offers and because tanners continue to buy in small chunks. Both sides of the market are trying to continue to minimise commitment and risk. Sales activity was spread all over. We could not trace any specific market preference. It may be mentioned, that to our surprise low grades have not performed as we expected in view of the general market and the prices normal hides are obtaining these days. A serious move into lower quality and cheaper material cannot be confirmed yet.
The exchange rate wasn’t a great help this week either and the euro is still in recovery mode. In our part of the world the market is preparing for the next round of abattoir buying and one can only hope that despite the strong market performance all hides still have a certain valuation in relation to their alternatives and with the present exchange rate and prices in other origins there is not too much room for advances for most categories. Packers will certainly take a different position and we have to see what the final outcome is going to be.
The kill: Slaughter remains low and in particular the kill of males has substantially declined. This has been going on now for two weeks and most packers are not forecasting any major increase until March. The kill of cows remains basically steady, but weights are still not at the level one would expect for this time of the year, normally the heaviest season. With the carnival season in sight and exports down one cannot expect higher levels soon.
What we expect: The next week will be quiet. Most of Asia is on holiday and at the present prices it doesn’t seem that too many buyers will continue to push. Quite the reverse, they might try to take the chance to dampen the market optimism a bit. Although we don’t see any major danger to the market levels yet, we will stay on the more cautious side and we are mainly concerned about financials. This might be too early, but better too early than too late.
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