Macroeconomics

Well, the last two weeks have been pretty exciting on the financial markets. It all started with a sharp rise of commodity prices and a sharp decline of the US dollar. Everything seemed to be so clear. European interest rates will rise, the American interest rates will stay low and cheap money will continue to fire the commodity speculation.

As usual everything came in totally different. Suddenly investors became significantly more afraid of the strategies, and the risk of rising interest rates in particular in the emerging markets became more and more evident. Many started to finally realise that inflation is a serious issue and the problem of rising prices is hurting the consumer in countries such as India and China. The more money you have to spend, the food less money you have to spend for other consumer products and the poor are suffering the most as the basics get more expensive.

There were tremendous tensions due to the rising dept in Greece and Portugal as well as the political tensions in many EU countries, which made investors worry and sent the EURO down. On Friday the trend accelerated and the USD gained, the EURO fell and ended the week close to levels of 1.40 again.

Apart from the worries about the European currency, the financial world also got more concerned about economic growth in the emerging countries. Rising interest rates and less money in consumer hands could slow down the global economy and would certainly hit commodity prices and industrial production around the world. Suddenly commodities lost quite a bit of their value and in particular precious metals saw a lot of their recent gains wiped out. Also oil, despite the ongoing confrontations in a number of producing countries, fell and prices have come down almost US dollars 20 per barrel in the last two weeks.

People are now discussing if this is only the correction on the way up or whether it could set a new trend for the rest of the year. Whatever it is, at least the over valuations which are created by financial investments are correcting and many commodities now find a bit more of their real market level rather than being just driven by cheap money and speculation.

The latest two weeks were certainly pretty volatile and interesting and possibly a lot of budgets and forecasts will have to be rewritten pretty soon. We have a lot of issues around the globe which can rattle the financial markets in the weeks to come.

Market intelligence

The leather pipeline was rattled by the general uncertainty of the markets. Beef producers see the markets on their side, and as prices are rising, they feel the by-products should also go the same way. With the strong performance of demand for hides and skins since mid 2009 and a good outlook for many economies, suppliers are basically of the opinion that every decline in demand is just short lived and not more than a simple short-term correction.

On the contrary, tanners are feeling the pain of rising cost not only for raw material but also chemicals and energy and the profitability is under severe pressure. Leather prices are moving up, but the rise is not sufficient by far and more and more producers are now seriously considering the decisions for the next season. Many of them consider production cuts if the raw material price does not come down while the leather price is not going up.

Most of the trading and the prices for hides are determined by the currency market in the past two weeks. Non-US dollar origins have become too expensive. In particular, American hides were able to take a nice boost and demand when the dollar fell just for a few days to levels which were pretty close to 1.50 against the Euro. The European currency lost a lot of its shine, but the market did not have time to adjust to the new currency correlations.

We are heading into the summer. In some parts of the world this will be pretty positive on the supply of raw material and in particular the US is preparing for the barbecue season. Beef prices have gone up, cattle prices too and farmers should be pretty happy about the situation. In Europe barbecuing is not a driving factor for beef demand and in the southern hemisphere the winter is also not supporting beef consumption. All in all supply should be reasonably steady in countries such as South Korea and Japan.

The question the pundits of the leather pipeline are raising today is if the leather demand might also see some influence from the concerns the general economy is now facing. Rising interest rates in the emerging markets, rising food prices and general concerns about the outlook for the economy could actually change the mind of the consumer and create more caution. Most of the budgets for the year 2011 seem already to be fulfilled and consumer product sales in the first quarter of the year have in many cases already beaten forecasts. However, this is all the past and many productions are now working against orders which were given some months ago. With the strong performance we had so far this year, most people are still pretty positive and very few have any concerns about future. However we all know how quickly things can change. This will not hurt what is already on the books, but since we have to look into the future and not celebrate what has happened in the past, one should at least watch the coming weeks or months pretty carefully to get a better picture on what we have to expect after the summer.

Being already mid-May it is pretty unlikely that we are going to see many changes until the summer break in July or August. Order books are still reasonably filled, stocks are actually pretty low along the leather pipeline and most of the producers are living hand to mouth because their raw material price calculations did not allow large positions and inventories.

Most of the regular and established manufacturers will have to continue to replenish their raw material regularly.

However the market is not without any obstacles. There are still a number of people believing that the tax investigation will continue to weigh on raw material imports into China. There are also still a number of stocks sitting around the country waiting for liquidation.

Everything will depend on how the leather demand and leather as a material is going to perform after the summer break. Some people pretend to know that a number of brands are going to reduce their consumption of leather just by substituting the material by textiles and other alternatives. Falling oil prices will certainly make artificial products far more competitive again. Trying to figure out what shoe manufacturers really have in mind, we tried to investigate some, but most of them are not really being of great help and the replies they have given have been pretty vague. This is indeed an extremely important issue, because fundamental changes in the material use will influence the leather demand not just for a moment, but for the period of a season.

The next question which needs to be answered is whether retailers and brands were possibly overstocking with their budgets for sales for the season 2011/12 in response to the fabulous sales and orders they have had in the past 18 months. People think reordering in the second half of the year could become much more prudent and conservative than what the trade anticipates at the moment.

The only industry looking further ahead is the automotive industry and their order books do not see any decline for the rest of the year, despite all the drama we had in Japan. So there demand for leather is pretty likely to stay quiet high.

For the moment tanners still have to satisfy their order books for the current season and with the dramatic rise of raw material costs in March and April they had reduced their raw material inventory positions as much they can possibly risk. There might be more raw material available than there seems, but it is not along the standard pipelines, but parked in many sideways and might not be available or suitable for those who need it. So, for the rest of this season players of either side should not really expect too many changes anymore. Prices of raw materials will rather react to revaluation needs, i.e. adjustments between one and the other origin.

Raw material still sees enough flow and demand to avoid dangerous accumulation. Tanners should have replenished inventories for the short term with their purchases made in the past week to withstand any ambitious attempts from the sellers to obtain again higher raw material prices. The new levels and ranges should be set after the summer break again.

The split market did not produce any major news during the period. Extra heavy splits are still in low supply and the more regular items are still pretty much in balance. The high price levels for hides and grain are still supporting the product.

Skins are still performing pretty well. Although the premium skins from Australia saw a sharp correction recently, the demand remains intact. Whether it was really a correction or if prices were just quoted into the sky without any realistic relation to the market levels remains an open question. However, in any case the demand for skins remains pretty decent and the spring lamb season in Europe still faces more demand than actual supply. Prices have run high too, but much more realistic than elsewhere in world. It seems, that tanners are quite optimistic for the coming season and the sales of nappa and double face. We feel that the skins prices have run a bit too high.

For the coming weeks we think that the final sort out of the market situation is not yet fully finished. The correction has been done and now the different origins need to find their relations. Consequently it seems that price fluctuation is related to finding the adequate levels between the options and alternatives tanners have. A certain risk or chance might also possibly arise from the financial markets. It doesn’t seem that things are in proper order yet and every day can bring new surprises. The financial world is not in balance. With commodity prices, stock markets and property prices being high a lot of people feel pretty wealthy and as long this is preserved they will continue to spend. When the investments are losing value, then they could become more restrictive again in their spending habits. The less wealthy will have to cope with the high level of cost for the basics of life and this doesn’t leave much money to spend for other products. It might be a good idea to analyse risk again and to be prudent in decisions until a clearer overall picture is available.

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