Market Intelligence—05.04.11
05/04/2011
Our concern about rising inflation is starting to be seen in reality. European Union inflation rose to 2.6% from 2.4%, extending the European Central Bank’s comfort zone. Experts are trying to make the world believe that the explosion in the price of food, energy and other commodities will not develop into sharply rising consumer prices, but these experts must either have been blind or far away from reasonable competence.
Anyway, without any change in price trends, the rise of consumer prices will certainly not be at an end yet. This is going to put national banks under massive pressure sooner or later to increase interest rates, which might be logical from an economist’s standpoint, but will be a great problem for national budgets and debt, which need to be financed for many years. The first to act, after some smaller ones have done so already, will be the ECB, which is still the most independent. The markets expect a hike in the weeks to come and that has sent the euro up further against the US dollar.
In the US consumer confidence rose and the labour market reported better news. Manufacturing is expending and that is good news for the long-expected recovery of the US economy. However, property prices fell, measured by the Case-Shiller index, and so there was still a wide range of opinion about where the US economy is heading.
Consumer demand remains strong in countries where the economy is still growing extensively (mainly the BRIC states, Brazil, Russia, India and China) and this is the driver behind the sharp rise of many commodities. Manufacturers in these countries are enjoying much better returns for their products in their domestic markets and so local business is considered to be far more interesting and profitable than sales into the suffering and price-conscious old economies.
Irish banks need another EUR 24 billion and that was another clear sign that the European banking crisis is far from over. There wasn’t much good news from Portugal either. The question of how expensive the rebuilding of destroyed areas in Japan will be has not yet been figured out and nor does anyone know yet what the final consequences of the nuclear crisis there are going to be. Nobody can know until the final results are seen and the reactors are safe again.
Oil prices are moving in a narrow band, reacting mostly to news from Libya. The US dollar ended the period at the upper end of the trading range at $1,4240 to the euro and is expected to suffer further losses due to the expected rise in interest rates in the euro zone.
Market intelligence
All interest in the past two weeks was focused on the APLF event in Hong Kong. During the previous week a number of the participants from overseas were already travelling in the region, so expectations were pretty high.
Some years ago, many people were convinced that the show in Hong Kong had little future with the leather business, with the organisers having moved into China and developed a number of fairs on the mainland. However, after some years of shrinkage the numbers of visitor and exhibitors has stabilised and the most now agree that, at the present size, the show still has a right to exist and is a benefit to the leather industry. It was again more a meeting place than a real leather exhibition, but the timing at the beginning of the spring is a good one for such an international fair to take place.
The calendar for fairs is a bit tight this year with the next events in Italy and Brazil already waiting for many who need to make global round-trip.
The fair was well attended and as usual opinions about the numbers and quality are as different as the people being there. We found that the majority in the aisles were happy and there was no complaint about activity in general. Usually the second day is the most active one. Not just for the number of visitors, but for general activity on the stands. Normally the middle day is particularly hectic. This year many were of the opinion that the first day this time was the busiest, with the largest number of Chinese visitors around. The second day was also very busy, while the last day – as usual, didn’t see many visitors and exhibitors were visiting each other.
Although opinions about the detailed results of the show are different there is definitely one consensus: that there were no big disappointments and the feared turn for a sharp market correction failed to materialise. Those who were sceptical before the show had to accept that leather demand remains strong, although not across the board. Shoe and bag leather remain strong performers and automotive is still performing too. Garment leather has also made a strong recovery and the only real under-performer is upholstery leather now. In the battle for raw material supply, upholstery tanners at the medium or lower end continue to be the losers, and more and more are deciding to cut production if their buyers are unwilling or unable to follow what other sectors are paying for leather these days. The high end of upholstery is doing better, but there are complaints there about bad selections and tanneries attempting to escape by buying selected wet blue material to get what they want and need, although this strategy also has its limits.
Prices were the main point of discussion at the fair. How many events have we already visited and how many times have we discussed the problem of leather demand and orders? Well, if we remember well it was most of the time, and we can’t remember one single event at which people were discussing demand and existing leather orders, only prices. The price of raw material is always in the foreground and raw materials are always too expensive; it seems that it’s never a case of the price of leather being too low. With most leather order books being reasonably full, albeit not at today’s prices for raw material, the main aim of buyers was to figure out options for a falling raw material market or to research alternatives at lower prices.
So the kind of raw material you were presenting was important. The number of people circulating to speak to their suppliers was quite significant and one had the impression that raw material suppliers were more important than leather customers. This is not a surprise if the assumption is correct that leather demand will remain strong. It’s just a surprise when normally around these fairs tanners are more interested in selling leather than in buying raw material. However, this is a reflection of many raw materials markets: manufacturers have been more concerned with finding buyers to fill their productions than with making sure they have enough raw material and an adequate price to supply their factories.
Anyone who had raw material to offer at reasonable prices would definitely have had a pretty good show, and enough interest to place whatever they wanted to sell. Anyone able to lower the average price of regular items was able to place everything they wanted. A difficult time was had by those suppliers with overvalued raw material levels, overvalued not in absolute terms, but rather in relative ones. Almost all raw material is considered too expensive these days, but there are some that, for various reasons, have run too far, too fast to be considered in tanners’ production any more.
This applies in particular to many European suppliers, at least in the average quality selection. European top-quality origins are still benefiting from strong demand for luxury items, but more average selection is totally overvalued in comparison to other alternatives. The weaker trend of the US dollar is adding to the problem and despite the strong demand for raw materials in general, the most expensive ones as usual are those that are neglected. While exclusive veal skins and the extra heavy hides suitable for automotive production are still finding enough interest (because tanners have few alternatives) the more mainstream products are at present neglected unless sellers are willing to accept serious discounts. As much as the situation might depress sellers of this origin, others are taking full advantage and this has led to discussion about whether the more attractive ones will rise in price or if the less attractive ones will be adjusted on the downside. It seems again that the answer might be in the middle. Some suppliers from Europe were reporting decent business, however if you check a bit more what has actually happened, the prices agreed were far from those mentioned as the market level in many offers. Since hardly any seller is interested in seeing the raw material market fall, a lot were claiming that they still had cheaper stocks, which they were using now to find average levels.
Although there was a general consensus that raw material is and will remain scarce for a while and the daily kill will not be enough to satisfy the needs of the industry, there are increasing discussions about possible inventories that may still be are around. In particular in China there are more and more people talking about where to find new stocks that are said to be significant. That was also the comment made by a number of Chinese tanners, who said that instead of buying expensive raw materials with extended shipping periods, they are finding it far more attractive to use local offerings to satisfy any immediate needs. These are said to be available at cheaper-than-market levels and they are also reducing the risk of buying raw material that could prove later to be far too expensive in the event of a market correction.
It seems that there is some truth in the rumours. A lot of players have been mentioning this option for quite a while, but on top of the traditional buyers from the tanning industry the demand has shifted also to wet blue traders. With a strong domestic demand in China for leather products many players were obviously willing to invest speculators’ money into hides and skins too, and as long as prices were reasonable they were buying to build inventories. Since leather prices have so far not adjusted adequately, those players have changed their strategy from building inventories to just maintaining or reducing them and to lock in profits. This would not only reduce demand, but also moderately increase supply and bring the market more into balance.
We are certainly far away from having a raw material market that is in serious danger, but for the coming weeks and maybe months we are quite sure that the trend will lose its dynamic and here and there some corrections are likely. However, corrections will most likely be seen as buying opportunities rather than the trend for a changing market in general.
With that in mind tanners are also changing their access to buyers and to leather prices. While in the past the fear there could always be a competitor taking business away at lower price levels, they are now changing their attitudes to be more selective with their buyers and to stick to the prices they need. That means consequently, that also leather buyers will have to reconsider their purchasing strategies and threatening suppliers may not be an advisable strategy anymore.
However, the usual answer to inflated material prices is also always to lower quality requirements and to think about articles that are less quality-demanding. Talking to a number of leather consumers we got the impression that lower-level qualities and leather types allowing cheaper raw materials are on their way back. In particular for commodity productions it seems that more finish and embossing is returning and the trend for full natural aniline types is fading. We are now entering into a lower season of leather production and this could help ease the pressure.
To summarise what one could get from the show we would say that leather demand is still good and rising consumption in emerging markets, plus reduced inventories in the old economies, will support the business in the coming months. However, enthusiasm is fading and the problems of profitability are making the industry more cautious.
The trend for cheaper leather and massive problems with profitability are also continuing to support the demand for splits. It is not yet fully clear if split leather is going to make more inroads into leather production in general, but the demand for splits remains pretty strong and continues to support the market. That is helping tanners’ calculations a bit, but is certainly not the solution in general.
The skin market continues to be fully firm. Being so much more seasonal and with inadequate supplies, a lot of activity to secure raw material supply took place in Hong Kong. The huge price hike in wool is also increasing the demand for skins. Fellmongering and selling the wool is subsidising the value of the pelts and helping skin prices to climb. Skins for double-face and lining are also enjoying strong demand and the seasonality of supply is causing a tremendous problem. Manufacturers have to secure today enough skins for the season without actually knowing if they can sell the leather in the end when the manufacturing season of these products starts. There is a lot of fire in this market and the risks are rising. There are already strong attempts to find artificial solutions to the shortage.
For the coming weeks we continue to believe, that the general market pattern will not change. Sellers are still recognising demand and supplies at the slaughterhouses continue to be reasonably well sold, so they don’t see any particular reason why they should be easy on prices. Consequently the possible stocks we have mentioned above will become more decisive in the short term. If the stocks are really available and the owners decide it might be advisable to lock profits, the imbalance between supply and demand could ease and the firm market trend could take a break for a while. We are now entering the second quarter, which is traditionally well known for being more quiet and sometimes the time of a downward or correcting market trend. The leather demand and outlook for consumer sales remains good enough for there to be no reason to believe in a fundamental change in the market. So, why not take a break and wait for a correction? Inflation will support leather prices, but eventually demand and supply will have to find a balance and this might now be the time to re-establish it.
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