German Perspective—08.03.11

09/03/2011

What happened this week: Another week with the same pattern as before. Tanners fighting and arguing about high raw material prices, sticky business conditions, a nervous market, but fundamentally still driven by the trend. Most still prefer to own product rather than to wait for lower prices. Although most other global markets are also still firm and there is no place where prices are in decline, negotiations have become much more complicated. Many tanners are starting to feel their economic limits and with many now already thinking about production planning for the second quarter, a bit of the heat is starting to fade. No question that leather demand and retail have been strong, stocks are well cleared and need replenishment, but May to September is in many leather segments, the low season and also the time for a chance to change designs, materials or whatever. This could also mean a cut in production and attempts to raise leather prices to new and higher levels. So, although nothing real has changed in the market with limited availability and rising prices one can feel that the trade is preparing to analyse what direction to take next. This is certainly also related to the upcoming trips to Asia in combination with the APLF exhibition in Hong Kong.

Everything is becoming more short-term; nobody wants to make mistakes and buyers and sellers take decisions at the very last minute. It is hard to see any professional planning any more. In addition one can see the side-effect of a constantly rising market by the increasing number of rumours and messages related to problems with shipments and cheaper contracts. A number of tanners have been pretty surprised when they opened containers in the past weeks and learned once again that there are still no miracles in this world and that any adventure with unknown suppliers can turn from cheap to pretty expensive at the end.

Most readers will be aware of an increasing number of unsolicited enquires and offers over the past months. Markets that are moving fast always attract flies and parasites. This applies not only to suppliers from origin, but one can see also an increasing number of speculative traders in China who are buying and trading for a quick buck. There is quite a bit of information that a decent amount of hides and skins are presently in speculators’ hands as they bet on further market rises. As long as producers remain well sold and leather prices rise eventually, the outcome could be positive. Any break in the trend would, however, suddenly bring more material to the market than anybody would expect today.

However, in the present environment of rising commodity prices and limited risk of sharply rising interest rates, investors will stay cool and not get too nervous in the short term. From the leather business the news remain the same. Demand continues to be strong with exceptionally good shoe sales this winter, the automotive industry is running full order books and the luxury industry is still fuelled by the excess of money the emerging markets are still making. A little is also added by the recovery of the global economy since mid 2009.

Tanners are not benefiting much, because their problem is still that the timing of raw material price changes and leather price adjustments never match when hide and skins prices are in a long-term upward trend. We should not forget that the leather business is not the only one facing this problem; a lot of other raw material-dependent industries face the same problem, but some of them had or have found better solution already. Yes, there was also some hide trading this week. Overseas buyers were willing to take some bits and pieces and most of the interest was for dairy cows and low grades. The falling US dollar is weighing on calculations and should also be a warning for those who are just betting on rising returns in euro. Summarising the week one could say, that it is a mixture of hope and pain. Trading and negotiations become daily more complicated. Prices for the week were more or less steady. Attempts to raise prices in expectation of higher abattoir levels in March were mostly unsuccessful and just a few in desperate need of material were willing to make small price concessions. The market dynamic has, in our opinion, faded.

The kill: The kill is falling back again. In particular the slaughter of males is down while the kill of cows remains more or less steady. This week is carnival week and so the downturn is not really surprising; the numbers will be depressed by the carnival season. The following week, numbers should slowly start to recover.

What we expect: The fundamentals haven’t changed. Leather demand remains strong, leather orders too and consequently the need for raw materials is not fading. So far, so good. There are more parameters in the business and the market is now testing where the limit is. So far it hasn’t been found. The market is well cushioned on the downside, but we think that the upside potential is for the coming weeks pretty limited. The international market is now waiting for the results of the trips to Asia and the sentiment at APLF. Until then we don’t expect any fundamental change.

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	€ 2,30	Steady
	25/29,5 kg	27,5/28,5 kg	22/27 kg	25/26 kg	€ 2,00	Steady
Dairy cows	15/24,5 kg	22,5/23,5 kg	13/22 kg	20/21 kg	€ 2,05	Resistance
	25/29,5 kg	27,5/28,5 kg	22/27 kg	25/26 kg	€ 1,75	Resistance
	30/+ kg	33,5/35,5 kg	27/+ kg	29/31 kg	€ 1,70	Resistance
Bulls	25/29,5 kg	27,5/28,5 kg	22/ 27 kg	25/26 kg	€ 2,20	Steady
	30/39,5 kg	36,0/37,0 kg	24/34 kg	31/33 kg	€ 2,00	Steady
	40/+ kg	45,0/48,0 kg	34/+ kg	38/40 kg	€ 1,80	Steady
Thirds	15/+ kg	25,0/27,5 kg	13/+ kg	24/26 kg	€ 1.35	Steady
Thirds bulls	30/+ kg	38,0/40,0 kg	24/+ kg	33/36 kg	€ 1.30	Steady

German Perspective—08.03.11 - leatherbiz: Lea

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German Perspective—08.03.11