German Perspective—15.02.11
15/02/2011
Packers just had to ask and it was paid. It seems that everyone believes that the price rises will continue and it is only a question of time until every price asked can be obtained in the market. It will certainly not be that easy, no matter what happens in the market in the next few weeks. No matter how strong demand may be and how low supply, buyers are still working on the the real value of hides and this applies not only in absolute, but also in relative terms.
While one can still justify the prices for males, even the biggest optimist cannot deny that other German hides have now left the fair valuation range in comparison to others. Prices for alternative origins now have to rise by a fair amount to make cows, for example, competitive again. Strong demand always makes cheaper alternatives rise rather than more expensive ones fall. This spiral may now come to a halt. Demand and need for raw material is strong, but a jump to the extent we have seen has no real justification. History is just repeating itself.
As long as the optimism rules and the pipeline remains low there will be little fear and trigger for the market to react. Even tanners don’t expect a quick correction and in some cases they do not even want a quick and sharp decline. Their main interest now is to obtain better and higher leather prices, which they would be unable to do if raw material prices suddenly corrected themselves. As painful it is for the moment, higher leather prices are the only option for handling the present situation.
Who could really have an interest in anything like a collapse or sharp correction? In the best of all worlds, leather prices would rise to adequate levels and demand and supply would slowly return to a balance. Under the assumption that all commodities are becoming more expensive, natural materials are winning more appreciation among consumers, and with rising wealth in many parts of the world, there is no reason why leather and hides and skins should not obtain higher revenues, but a major correction of prices will just see the industry falling back into the same habits and customs as before.
Meantime there are still a few obstacles on the road ahead. Apart from prices we still consider finance a major problem, as, of course, is overcapacity. With all drums rolling there is not enough raw material available to fill them. Supply doesn’t look as though it will rise by much in the coming months and so capacity needs to be adjusted.
Trading this week was divided into two halves. At the beginning of the week activity was almost non-existent. The Asian industry was still on holiday and Europe was waiting to see what abattoir prices in central Europe would do. In the second half sales gained a bit of speed. Some tanners in Asia were back at work and were willing to test the market, although with little success. In Europe tanners realised quickly that their hopes for a moderate price rise were in vain. They tried to fight the impossible, but by Friday midday the first ones had bitten the dust and accepted higher price levels. The increases might have been even greater, but were significant for males. Bids from Asia improved as well, but in our case sales were isolated and mainly restricted to some lighter weight cows and low grades. However, some interest was left open for this coming week, although we think that full asking levels will be out of the reach of tanners for the time being. Numbers were less than average, but reasonable in view of the kill.
The kill: The kill has incrementally improved. That doesn’t help much, as numbers and weights are still well below average. In particular the kill of males is still disappointing and we are waiting for new export sales of beef to support the kill. Weights continue to be pretty low for the time of year. Some expect exports to resume in the coming weeks, but we are not too sure about that any more.
What we expect: The market for males in Europe is done. Some will certainly try to push it even higher and over the coming weeks we will see how desperate tanners are to keep productions filled. The market for cows will most likely not fulfil expectations. More money? Yes, but not what is actually needed to justify the prices that are paid at the abattoirs. Asia, too, will be cautious for now.
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