German Perspective—08.02.11
08/02/2011
The driving force behind the market remains the fresh hide production of automotive tanners, which immediately runs into procurement problems when slaughter falls behind soaking and production budgets. This always sets the local market on fire and spreads to other hide types that have absolutely no relation to this particular segment. Regular dairy cows follow totally different market conditions from specific males or calves. Anyway, whatever logic is being applied to the market at the moment it is covered up by the supply situation and the interruptions of supply from Australia, for example. Some may even believe in threats to international logistics if the situation in Egypt does not reach a peaceful conclusion; the Suez channel would become an insecure passage again.
Old pundits always see times of global political crisis as a support to commodity prices and with the tailwinds from other commodities, the hikes we are seeing now are taken for granted by many. All the good news from automotive, shoe and luxury accessories add and support the strong performance of the market and just from the supply and demand situation one can still hardly find a cloud in the sky. That means any limitations can only be expected from the other determining factors of entrepreneurial life. Tanners have to watch their cash-flows carefully and leather buyers should make sure that their suppliers can handle the situation on a longer term basis. Ignorance to the facts and hardlined dependence on budgets and plans are pretty likely not good handles at the moment to manage the situation.
Over the past weeks almost everything has been analysed and said about the fundamentals of supply and demand, the global economy and so on. Now everyone is ready for the showdown of the new abattoir buying for the next four to five weeks. In such a market environment, longer-term buying intervals are becoming increasingly difficult. Instead of incremental short-term rises, a volatile market always has to cover, compensate and absorb expectations for one month behind and one month ahead, which makes life pretty difficult. The aim of packers to jump three steps ahead and, at most, one back is even more amplified under the market circumstances we are in today. The ambition to test how far it can be driven this time is even stronger with so little to risk from the supply and demand ratio they see in the market today.
This brings us back to our concern regarding the possible risk arising from the financial side of the business. It is certainly naïve to think that the financial resources of the leather industry in general are strong enough to handle the recent rise in raw material and production costs. Sooner or later demand will fade and people have to purchase in keeping with their budgets; if they over-stretch their budgets there will be consequences for payments. This might count more for the European tanners, but eventually Asian buyers will also have to check their resources. However, it doesn’t seem to be part of any discussion or concern today.
In the meantime the slaughter industry has pulled the masks down and is testing resistance levels with 10%–15 % higher asking levels compared to a month ago. By the end of next week we will see how much of the increase they have been able to push through, and in a second step how the tanning industry is going to deal with it. Despite all supply and demand issues it seems at least on the Asian markets pretty unlikely that price hikes of this kind can or will be accepted.
Trading has been light. There has been a lack of offers because people have no clear picture of what hides will cost next month and there has been limited demand from Asia due to the holiday season there. For what was sold, prices went moderately higher. The US dollar had a weak start to the week but was able to recover somewhat towards the end, which made little difference. As a result of the Asian holidays most activity was seen for males this week with hardly any interest for cows.
The kill: Nothing new on the supply front. Kill remains pretty low and the number of males too, which is actually part of the problem at the moment. Before the end of last year information was given that the higher kill would continue throughout the first quarter and supply plans were made accordingly. With the sharp decline in January and little hopes for February, supply schedules can’t be fulfilled. We have no serious information that any change is to be expected soon.
What we expect: This coming week the Asians will be back and will be disappointed about the market trend. Let us wait for their reactions. In Europe the discussions about supply and prices will intensify and it will be interesting to see which conclusions people reach in the end. We don’t dare to make a forecast, but some players seem to have little choice. However, the market will certainly not see the same reaction for males and dairy cows and hopefully this will be considered in the decisions taken.
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