Market Intelligence—31.05.11
31/05/2011
The financial community still cannot decide what they consider to be worst: the debt crisis in Europe, the growth and budget problems in the US, or the problems of Japan, which could also eventually have a serious impact on the global economy.
The situation of the global economy is definitely not as bright as it was some months ago. Of the large and important economies, basically only China and Germany are performing extremely well and delivering growth rates that can be called solid and healthy. Some other emerging markets are doing well, but their importance to the entire world is still rather limited. In China the government is fighting rising inflation and it seems that the ambition to slow down growth is finally having success. The Chinese index for measuring industrial activity fell again and has reached the lowest level since mid-2001. Talking to Chinese contacts, they are all concerned about possible riots because the rising cost of basics is eating into incomes and farmers are complaining that rising food prices are not reaching their pockets. There are increasing rumours of riots in the countryside and the government has its hands full to keep things under control and to prevent further unrest.
With concerns about the global economy, some commodity prices began falling some weeks ago with financial investors pulling out of the markets and trying to lock profits in. But since there are no real investment alternatives around and the possible consequences of the debt crisis in Europe remain uncertain, money is flowing back into the commodity markets, and precious metals and oil are back up from the levels we saw two weeks ago.
Those who have money to invest find it increasingly difficult to react to the hide uncertainties in the markets and to find serious possibilities to protect their wealth. The defence strategy against inflation and possible turmoil in the public sector is still to invest in agriculture, precious metals and stocks with a fair value. Normal families are more concerned about how they are going to maintain their standard of living if inflation becomes an issue, and about what might happen when there is more money needed to bail countries out of bankruptcy. No matter what politicians are saying today it will cost the taxpayer a lot of money again. Those people who are living in the countries that are today on the edge of bankruptcy feel the pain already today with all the tax rises and expenditure cuts that their governments have to impose today.
Although nobody is really asking for another major problem in the global economy after the crash of 2008, the imbalances are pretty big and one has to be pretty concerned about the possible consequences we might face in the near future. Let’s just hope that we are not travelling on the Titanic and we have to wait until the band stops playing.
We have no intention of being overly pessimistic, but where is the global master plan to sort the big problems out? Without understanding between the big players it’s going to be pretty hard to handle the challenges.
Market intelligence
Not too much has happened in the past two weeks. As we discussed already above the market started to normalise after some of the corrections and concerns we saw before. The same applies to raw materials for the leather industry and the leather pipeline; we have returned to ‘business as usual’.
Neither the tax investigations in China nor any general concerns about the global economy have had such a deep impact on the market for raw hides and skins that the correction of prices widened. Our expectation that the raw materials market would be busier trying to sort out price differences between the various origins seems to have been correct and only minor price variations were seen in the different regions of the world.
There was a moment of surprise when there were rumours around the trade that one of the privileged raw materials, the heavy high-quality bull hide in Europe, was facing problems in finding enough buyers. With a good order book for the premium manufacturers of cars in Europe, it was hard to believe that, with the seasonal decline of the kill, suddenly more hides would be available than needed. However, since the price for this kind of raw material had been rising so much and tanners have been unable to convince buyers to pay an adequate increase, the ambition of the industry was obviously strong enough to stay out of the market for long enough to threaten some of the suppliers to the extent that the flow of fresh hides could be interrupted.
This may have been enough to scare some suppliers and to correct the price levels of some sellers by 10–15 cents in a week. However, it seems that this did not apply to all and those suppliers who were sitting on more comfortable sales positions were not willing to be scared and they reported only moderate corrections. In any case, as this market has seen modest declines since its peak in April, today’s prices should put automotive tanners in a much more comfortable position with their calculations. It seems that that if they are able to get another 3%–5% reduction over the summer, a lot of their problems of profitability could be resolved.
For the rest of the market there was something like a showdown between the large suppliers and the big buyers in China. Those who thought that the tax investigation would reduce the demand for hides from the main consumer by enough to affect prices significantly were wrong. It is leather demand that commands raw material needs and if one road is closed another one opens up. Since the smuggling and tax evasion procedures are pretty much related to smaller tanneries and certain areas, those operating in more straightforward conditions are pleased to see that their competition is losing an obvious advantage. Also leather orders have to be redirected and buyers that be supplied safely from their original suppliers have had to look quickly for new ones.
Reports from China suggest that the investigations will continue and will spread all over the country. Since nobody is expecting that the investigations will stop soon, one has to assume that the import traders and tanners involved will stay out of the market for some time. It seems however, that this is not reducing the general demand for hides. Looking at the export statistics, the weekly sales and shipments have not really been affected so far and a number of industrialised tanners in the north are reporting that leather buyers are contacting them instead of the smaller and possibly non-licensed operations they usually use.
In the upholstery sector the seasonal decline of orders is dominating the situation. Many upholstery tanners were pretty happy with their order intake in the first quarter, but most of them are now reporting no follow-up since mid-April. The order books will allow most of them to continue with production until the summer holidays, but the demand for upholstery leather seems to be strongly declining. This is a pretty normal situation at this time of the year in Europe, but Asian producers are worried too because domestic demand, which has been the driving force for a long time, is fading now.
Under these conditions you would expect raw material demand to decline significantly. And indeed there are some question marks against the information coming in at the moment. On one side prices have come down since the APLF exhibition in Hong Kong at the end of March. Prices normally only fall if demand is not strong enough to satisfy sellers and they have to reduce their price levels to attract more buyers to absorb their production. This has been the impression in the past weeks, but doesn’t really match the statistical numbers one can obtain about sales. In addition we hear, that a number of tanneries are running very low inventories and have been out of the market for many weeks now. These numbers are not totally reliable, but they don’t match up and there must be some imbalance in the equation.
We have the impression that this is related to the quality and reputation of supply. Tanners have been fairly disappointed with the quality and reliability of what has been called attractive or cheap at the time of purchase. Most of the purchases have been redirected to reliable producers and good names. This seems to be confirmed by the information that many Chinese customers and agents are travelling at the moment to sort out quality claims.
Consequently the better names seem to be pretty well sold while on the other side questionable sources seem to be stuck with raw material and hope now for a strong recovery of prices to enable them to find buyers again for their product. This would explain why on the one side sales have been sufficient and many sellers say they have a fairly satisfying forward position, while on the other there are plenty of cheap and large offers circulating, giving some the impression that raw material is in abundant supply can be bought without too much hassle.
What also plays a role in the present market evaluation is definitely the fact, that the general disposition of raw materials has become much shorter. Many will remember how much people used to complain about the export statistics and the reliability of the numbers. A lot was related not only to long or short positions, but also to the fact that many contracts and sales had never been corrected to the reality. And so a lot of casualties were still run in the numbers and buyers and sellers were used to positions that were about letters of intent rather than serious contracts that were planned to be executed. After the drama in 2008 the serious players in the trade decided to work at more realistic levels and that means that neither large inventory positions nor large forward positions are run anymore. It seems that depending on the market and origins’ contractual commitments of 48 weeks are pretty much the average and in some cases this might be extended to 12 weeks, but not much more. Also quantities are far more in keeping with reality, that is, what suppliers and buyers are really producing.
The split market is unexciting at the moment. Standard splits are finding a home in pretty much the same volume they are produced. There is no real or serious indication that splits will be the dominating article in the production of the next seasons; they are just an adequate supplement in the total leather production range. We have heard about no important change in prices.
The skin market seems to have found its limits too. There is still good demand for skins, in particular for lightweight material suitable for double-face production. However, the bonanza we have seen for quite a while now has come to a stop. More material is available in Europe due to spring slaughter in many countries and this has eased the supply pain. Buyers have become far more realistic about fair valuations of skins and the buying at whatever price has come to a stop. Sellers have had to become more realistic and it’s no longer a question of just throwing prices out and getting a sale from somebody somewhere who was afraid of failing to meet raw material he needs. It is still something like a gamble because many tanners are still buying blind. If the demand for double-face garments fails to meet expectations it could become pretty nasty after the summer break.
We find it extremely difficult to make any predictions for the coming weeks. Some of sellers’ concerns have faded and many producers have been able to get back into a comfortable sold forward position. On the other side we should not underestimate the stocks of odd material that are definitely around and still need a buyer. The price range between asking levels is wider than ever before. Price differences for the same paper description of more than 10% are pretty common at the moment. This will make it difficult for buyers to make the right decision. It’s also true that tanners would like to buy cheaper raw material but officially they don’t want to risk losing orders and the prices for finished leather they have been working so hard for in the recent months. In the best of all worlds it seems that a moderate slide in prices would be the best for everyone for the rest of the year.
Buyers would like to see lower prices but they don’t want them to be published. Sellers obviously have little interest in reducing their price levels, but it might be a decent decision for them to allow further room for adjustment. Leather demand is still stable and everybody should be happy to leave it like that as it means the product flow will not be hindered by pricing or cash flow problems.
We believe that the market has not really sorted itself out yet. The relation between quality, quantity and price between the different raw material origins and alternatives is not yet in a reasonable range. Consequently we do not expect any general price trend up or down, but rather more the continuation of the price adjustments between the different options.
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