What happened this week: It was in the end a pretty complicated week. Although nothing fundamentally changed, the market tested the limits, which we saw it do last summer. A number of parameters have changed since then. Leather prices have gone up, split credits have improved and the leather order situation has improved. Consequently, the present prices look much more justified than half a year ago. All this might be true, but the market continues to struggle to deal with the present levels. It seems that the vast majority of the canning industry is not operating at profitable levels and this is putting the discussion about leather prices back on the table.

Most tanners are pretty excited about the present raw material levels, but those who are a bit less emotional about the situation are taking a pretty rational view on the problem. They consider this season to be gone and don’t expect that there is any realistic chance for a short-term correction. They are much more worried about the future, given the fact that their clients have to make decisions by how much they are in the position to lift product prices without losing too many sales.

So, for which product will the material price have the least leverage? Well, the answer is pretty easy: cars and luxury items. While luxury brands are a bit more generous, the car industry continues stubbornly to ignore the fact that if they want premium interiors and to keep their margins, they must adjust their prices for the material. In the end specific superior raw materials can only be used when they are paid for. When the car industry starts the year with full order books and forecasts of double digit growth in the premium segment, one can be so naïve, that this is not reflected in the prices for a raw material which is limited and pretty inflexible on the supply side. In a way we are back at a stage where we have been in the past. If the automotive industry wants a consistent supply they have to allow a constant premium for the raw material to prevent an exodus of suitable hides into other productions.

It is unlikely that in all the projections, the massive rise of prices for energy and food has been considered, as well as the changing political situation in Northern Africa and possibly in more Arabic countries. For the moment this is changing very little. The plans are made and the orders for the coming months are in the books and need to be fulfilled. Any further impact will have an effect before early spring.

Business was difficult this week. The falling USD, the general political situation and the price for oil and fuel rocketing left very different influences and impressions. Top quality buyers changed into a lower gear and were mainly just checking the market, alternatives and options to secure their raw material supplies, but were however, not very ambitious to join the party of any higher prices. Activity and courage to buy came much more from non-regulars and traders. This was bargain-hunting rather than real substantial interest at asking price levels. It took a while until something serious eventually transpired and in the end a few dairy cows were sold. Prices are not really what they should be and we had to make concessions considering what is paid at the abattoir doors. Leather demand is still not the problem, but rather the increasing number of voices saying that leather orders are turned down by producers, because leather buyers are not willing to pay adequate prices. Many others are suffering from orders booked in 2010 and which need now to be supplied from raw materials bought at levels of 2011.

So, we are just progressing with hardly anyone being happy, with the possible exception of a few who are still disposing of stocks and who are now in the position to turn them into decent profits. There are some interesting rumours, too, with several tanners reporting that after prices being established, some suppliers suddenly started to deliver  more quickly and in larger volumes than initially discussed. So, here and there some hidden stocks were waiting for the right time to be liquidated and we are curious to see if possibly some more will turn up and bring the market back into balance quicker than one would have thought.

Summarising the sales this week, it was bits and pieces in males close to market levels and acceptable volumes in dairy cows well below what the hides should cost to break even.

The kill: After a smart recovery of the kill in the past weeks we saw the number declining again this week. We fail to have any explanation, also considering that we understand from other regions of the country that the kill was not down in general. Maybe it is related to some export business and the type of cattle required for the same. We now have the carnival season in sight and we expect the numbers to be negatively affected for some weeks. Hopefully we should see some recovery by mid-March.

What do we expect: The general concerns about increasing oil prices and the consequences for prices globally are rising. Increasing fuel and oil prices will have a massive impact, as we know from the past. Many are trying to play the facts down, but if the situation is not going to calm down in the coming weeks, it will not remain without effects in the leather pipeline too. If it were only psychological it would already be enough. It might take some weeks, but the market is definitely ready for a break to sort itself out and to define the future valuation of hides and skins.

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