What happened this week: Our market finds it extremely difficult to sort itself out.  Although it is pretty clear that hides are overvalued there is massive resistance to accept the obvious and sort things out. The prices for bulls should be lower, but with the specific situation in Europe depending on fresh hide supplies and the dominance of the automotive tanners, in this particular market different market rules apply. From the valuation of the material and the leather prices paid the level for this specific raw material should be about 10% lower, but supply and demand doesn’t create the necessary conditions to allow the market to react the way it should. Tanners’ order books are still well filled, auto sales don’t show any short term decline, i.e. tanners are not in the position or forced to cut soaks in the season when the heavy, male material is not killed in any adequate numbers.

Since there is not only demand from the automotive tanners but some premium side leather tanners also, the market is pretty well supported and this makes it pretty difficult and hard to let it move to a fair and adequate valuation of the relative raw material. The biggest problem is that abattoir prices have been overshooting in February/March in a crucial mixture of speculation, high expectation, market politics and an ignorance of the currency market.

The situation is different for all the other items which are representing a majority of the hide production in the most part of Europe; dairy cows and medium weight standard material. They are in direct competition with plenty of other options around the globe. So we are dealing with two problems: firstly the hides have left their value range already with the last price hike in at the abattoirs early this year and secondly, the alternatives have not made the price advances needed to make our hides attractive again.

The world market and the USD always made it right in the end. Hide prices at unprofitable levels, upholstery leather prices not seeing the dynamic to believe in sufficiently rising levels soon and speculation on profits from the general rise in raw material prices have reduced the demand, so that there is no shortage of raw material anymore – if there has ever really been any.

Wherever there is still demand for raw material in the medium quality range, tanners find the hides too expensive for their calculations and try to average down either by buying cheaper and lower grades or taking their chances on cheaper re-sales of stocks being available. We are now entering the low season of leather production in the main consumer products. This goes hand in hand with reduced kills. The market is at this stage still supported by steady and reasonable demand for leather until manufacturers decide to shift to other materials for price reasons.

The USD remains a problem, extending its decline against the EURO weighing on the valuations too. Trading this week was difficult, but at the end hides were moving when reasonable agreements with regular customers were found. This is still not resolving inadequate prices at the abattoirs and it has to be seen in the next 10 days how long politics will overrule economics.

Prices are barely steady for bulls and cows could only be sold at levels fair below abattoir prices and at discounts, with the gap between market and abattoir values widening.

The kill: The kill is presently pretty volatile. This and next week will be short and the Easter holiday reduced the numbers for a while. In addition the is weather good and farmers have sent the cattle out into the fields. The coming weeks we have to expect less volume.

What do we expect: We still think that the correction mood is in place. Selling prices have been partially adjusted already and this needs now to be transferred to the abattoirs as well.

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