Market Intelligence—03.05.11
03/05/2011
For the last two weeks most of the financial community has been waiting for explanations from the chairman of the US Federal Reserve, Ben Bernanke, regarding the monetary policy of the Fed in the near future.
It was celebrated like a rock star press conference and there are rumours that Mr Bernanke even rehearsed his appearance a number of times. Well, where have we gone when it is more important how you perform and what you don’t say instead of what you are and what you say? However, it fits not only into today’s world but also into the US economic policy; the world is trembling as it contemplates what Quantitative Easing (QE II) will mean in the end.
Mr Bernanke is still of the opinion that inflation is not a factor and the rise in commodity and energy prices is temporary and inflation is under control. The US has in the meantime pumped more than 2 trillion dollars into the system and one really wonders what the economy would have done without this excessive injection. It remains a debate among experts if the promise to keep the flow of cheap and easy money is for good or for ill. For the moment it is certainly inflating commodity prices, it is weakening the US dollar, it is firing inflation and it is not changing any of the structural problems of the US nor resolving the budget problems of the country.
So far this has rather ended in a downgrading of the US long-term rating and making the future financing of the huge deficit more questionable than ever. It looks a bit more like checking the petrol tank with a lighter and the neutral observer has to ask the question: qui bono, who will benefit from this? Being cynical one could say it is just a coincidence, that the Federal Reserve is not an independent central bank, but actually a private bank owned by the system.
Meantime the dollar lost further ground and the level of $1.50 to the euro is not far away any more.
The debt crisis in Europe isn’t bothering the public any more and it has only been in elections in small countries like Finland where anti-euro currency parties have made some headlines. In the mass media the troubles of Greece and Portugal are little more than footnotes these days. This is dangerous as there is no good news coming from these economies and one day bail-out decisions will have to be taken that will hurt the financial system.
China continues to boom. Analysts expect another growth rate well above 9% for the second quarter, higher than the government’s target. This is keeping China’s currency reserves rising higher and higher. In an attempt to get a handle on the problem the government has now decided to inject another $200 billion into the national investment trust for corporate investments around the globe.
Well, anyone who has an interesting company to sell these days might see some good chances with the right connections in the near future.
Commodity prices continue to rebound and rise. Precious metals are setting new records week by week and oil is back on track to hit the record levels seen in 2004. Cheap and excessive money fuels the situation and with the lack of real and productive investment the whizz-kids continue to pump it into commodities. Well, this has to end one day and everybody will know when it does.
Market intelligence
Well, we are not here to compliment ourselves, but the last issue of Market Intelligence described the situation pretty accurately and not much has changed since then; the facts and fundamentals described then are still valid today and we are in our opinion right in our description of the market situation.
Trading was light and tanners feel that they are today having a bit more of the upper hand on the market and by buying less and waiting they can finally move the prices in their direction. On the other hand they are confronted with pretty stubborn sellers who think that it is only a question of time until buyers have to come back and accept what is being asked owing to the persisting strong demand for leather products. At the moment both sides are refusing to move much and this is resulting in less trading volume and officially only moderately sliding prices.
However, the market is a bit different from two weeks ago. For origins that are outside the US, the continuous fall in the value of the US dollar is becoming a big headache again. Traditionally, product prices never adjust at the same speed as currency moves and this is causing short-term revenue problems. In particular Australia and Europe are facing a strong revaluation of their currency against the greenback, which is putting quite a bit of pressure on the local prices of hides. This applies only to those articles that are mainly for export.
The second event that has changed the situation in the hide market and the leather pipeline is an investigation by Chinese customs officers into smuggling and tax evasion on the import of hides and skins. In particular a number of agents mentioned import companies predominantly located in Hong Kong. The operations are not really uncommon and a number of hide and skin imports have always been done through Hong Kong, but what was mainly a problem of documentation and origins has become more and more the subject of smuggling and avoiding customs duties and taxes. Considering that we are talking about a figure of approximately 20% to 25% of the hide value, one can easily imagine how much this has and can manipulate the market prices and how much it is weighing on the competitiveness of the operators between those were doing their business the straightforward and official way and those working on raw material costs that are significantly reduced.
Those who are close to the subject are saying that this investigation will be somewhat bigger than the normal controls people have to deal with anyway. Officials from Beijing are involved and the number of investigators is a lot higher than usual. Short-term arrests, a complete copy of office documents and computers have taken place and quite a number of market players are pretty nervous that they could be visited by the investigators soon. Some people are said already to have escaped and they can’t be traced anymore neither at their homes or by mobile phone.
As usual there are different interpretations of the situation. While some are of the opinion that this is going to have a serious impact on the short-term market trend, others are convinced that this is just going to be temporary, and since leather demand is not touched, the demand for raw material will not decline and the market will just run its course as it has done before. Others are of a different opinion and see some pretty decent short-term correction, pointing out to the fact that a number of containers are stuck in the ports and an even bigger number of containers is on the ocean and cannot be imported at the moment because of the investigation. Since the sale of this material has not been done on straight letter-of-credit basis a lot of hides for which traders are expecting payment are not going to be paid for.
Whatever the final result, one can hardly expect that the situation will have absolutely no impact on the market situation in the short term. We have talked a number of times about possible shocks in the market and this might be one. Psychology is always a factor too and buyers were just waiting for something like this to justify their attempts to bring raw material prices down to be more in line with their leather revenues. The question is rather how many and which type of hides and skins will be affected. Only when this is clear will it be possible to come to a final conclusion about the ongoing effects of this incident.
For the time being, the impact seems to be higher than many people thought it would be and we hear also that not only the hide and skin sector is involved, but also that other raw material importing sectors are being supervised as well. It seems that the Chinese government is again showing its muscles and making clear, that they are not going to tolerate any kind of games and tricks from the commercial sector.
There is a lot of talking and chatting going on and everyone is trying to figure out what it could mean to their business. Not many have any serious interest in a sharp correction of the market and so most are being pretty careful with their statements regarding the matter and the market.
In Europe the market for fresh and heavy hides for the automotive industry remains in better shape. The premium car industry is still enjoying healthy order books, which relates pretty much to the market for heavy and premium hides in Europe. With the seasonal decline of slaughter and weights the supply is falling and this is supporting the market at the moment. However, it is only a question of time until market logic applies and it will be interesting to see for how long the niche markets can escape from the situation. The rising numbers of US hides being sold in central Europe is already showing some of the market realities.
The split market is so far not in the focus of the general turbulence, but sooner or later it will have an effect here too. At the moment it seems that supply and demand are pretty much in balance and we couldn’t trace any particular news from the market.
The skins market is so far still firm. In Europe the ‘fight’ for the new season lambs is on and prices are quoted at pretty high levels. There is a lot of bargain hunting and a lot of phones and mails are sent around with enquiries. We haven’t heard of too much business being concluded because sellers don’t want to sell the material before they have the skins in the warehouse and buyers don’t want to fail by buying too early and at too high a price. There are a number of people saying, that the customs investigation in China is also going to affect the skins business. A lot of odd origins are smuggled and traded via Hong Kong too and despite the investigations not focusing initially on this material, it could be that the investigations will discover certain operations and be expanded. For the north of China and the nappa lamb or sheep business the situation is a bit less complicated and players don’t see any serious impact on their business.
The coming weeks will most likely reflect the progress of the investigations. If the product flow remains intact, letters of credit come in on time, and hides that need to be resold find a quick and reliable buyer, the situation could be quickly resolved. We are not too concerned about the market as such, but we have been of the opinion for a long time that the market is overvalued despite good demand and there is a fair chance that this could be the trigger to the correction. We estimate the price correction potential to be between 5% and 20 % depending on type and origin. An adjustment to that extent would be sufficient to return to reasonable calculations, considering also the rising cost of energy, materials, labour and so on.
Non-US dollar-based origins have in addition to watch the currency movements that are and will be another strong factor for the individual price trends.
Trading will most likely be pretty difficult in the coming weeks. Many buyers want to hit the bottom now and will be reluctant to step in before there is a clear turnaround situation. On the other hand sellers are not willing to surrender too quickly. In our opinion prices will continue to slide and one should actually stay alert to the possible consequences of the situation in China, which could change the situation day by day.
Share this story:
