Macroeconomics

The past two weeks delivered quite a number of news from the global markets, but the actual market movements were pretty limited in view of the importance of the facts delivered.

The most important ones were, in our opinion, the pretty weak numbers from the US economy and the ongoing bailout efforts of Greece in the EU. The labour market in the USA and consumer confidence were pretty low and increased the worries that the American economy could go into a recession again. The FED reconfirmed their position, to stimulate the economy with low interest rates and kept the levels at the record low levels, despite the rising concerns of many experts that this monetary policy is not going to solve the problems. The budget deficit of the USA is a major problem. The weak economy in combination with the role of the global police seems to be a bigger challenge than the economy can handle. The deep conflict of political opinion in America is preventing from a common and nationwide effort to turn the situation soon.

In Europe the situation doesn’t look much better. The EU has now been trying for months to handle the debt problem in Greece. As always in politics, problems are played down at the beginning, only to be delivered in all details and realities later on. The fact is that Greece is bankrupt and even all the admirable efforts of the country are not enough to prevent from failure. EU politicians are now just trying to sell the problem to the public and opinions are totally different. The main difference at this moment is not really whether Greece shall be rescued, but who is going to pay for it and how. In the end it doesn’t make much difference if private investors are directly involved or not, which is the main topic of discussion, because the EU tax payer is going to pay the bill anyway – sooner or later. It is not only the debt with private banks that is the problem, but also the big amount of trash loans which are parked with the ECB. The problems of the Greek economy are so profound that no action would prevent the country from building new debts in the coming years. One should imagine the huge amounts of budget surplus that will be needed to bring the situation in many countries back on track. For the moment the ECB is trying to ease the pain by holding interest rates down despite rising prices in the EU area, but it has indicated that the next hike has to be expected for July. 

With the problems of Ireland and Portugal on top, the situation is that Europe is not at ease and politicians are starting to drop small warnings to the public of what could happen if Greece and other countries fail. This could mean a threat to the financial system that would be as difficult as the Lehman crash in 2008. But how to manage and correct the mistakes of the past? 

The OPEC was not able to agree on a rise of production in order to lower prices of oil. Those countries in desperate need of money insist on holding prices high and so the cartel was not able to agree on production hikes to support the global economy by lower oil prices. The price for a barrel of oil climbed back to levels of $100 or $120 depending on the quality one is discussing. The USD was eying the level of 1.50 against the EURO again, but eventually the debt crisis and the ECB decision to hold interest rates down made investors decide to liquidate EURO positions and the rate fell back to levels of 1.435.

Market intelligence

The past two weeks were as uneventful as we expected. There is no real market mover at the moment which would trigger a major movement of prices. There is plenty of news which could and would trigger price movement in ‘normal’ times, but at the moment one can sense that none of the big players have got any particular interest.

That is also easily explained. The speculative factor has faded after the sharp recovery of prices since 2009. Most of the investors had been buyers of hides and skins, because they were reasonably cheap and promised profits just by trading. They feel that after the correction, there is not much potential left for prices, which means that their buying activity has declined a lot since the end of the first quarter.

The unknown factor is still the influence of the tax investigation in China. A lot of conflicting news is circulating the trade and while some are saying that deliveries which could have been a problem have been successfully redirected, others are saying that large numbers of containers have already got stuck in Hong Kong and other Chinese ports and they are now waiting for new buyers, because the original ones have disappeared.

This might still become a factor in the market, but for the time being it is quite depressing that such rumours are not influencing prices at the moment. It is also significant that there is no significant surplus of raw material in the pipeline. This proves that speculators are also unsure about the next market direction, because the normal logic of ‘what doesn’t go up, has to come down’ is not really initiating any short selling either.

Indeed, every producer you speak to around the globe is admitting the price corrections over the past two months or so, but none seem to be in any serious worry about the sale of their production; nor could one sense any stocks worrying any of them.

Consequently we are seeing most people quite relaxed and happy. Sounds strange, but it is the factual truth. Producers – although greedy as ever – know that the level they get for their by-product at the moment is pretty decent. They also read the news and follow the reports of their clients which means that they are aware of the risks in the global economy. So, they are quite happy to keep their stocks clear and are not yet willing to bet on the next market rally.

Although there is never a time when everybody is happy, it seems that hardly anyone is interested at the moment in the fact that we are going to face major changes over the summer months. Sellers want prices to be higher and buyers would love to see them lower. But sellers understand about the risk if prices would be significantly higher and tanners would hate to see sharply declining prices, as this could cause trouble for their leather prices and the upcoming discussions after the summer holidays.

Since we are already living in a pretty low volatility period for a while, people are still pretty relaxed for the summer, but the first meetings are already set for the discussion of the price scenario for the entire second half of the year 2011.

We hear about a lot of phone calls networking, because almost everybody is aware of the fact that the hides and skin market is hardly ever stable for a longer period of time. Many big players are now trying to figure out how things could develop and what the risks and chances are for the rest of the year and for the production season of 2011/12.

One thing is definitely true: the access to the problem is getting increasingly professional now. While in the past, market forecasts where mainly left to emotion and personal opinions, the industrial players are starting to get away from wishful thinking and move much more towards a professional analysis of the realities.

Doing, that they realise how tough it is. To obtain the necessary data, to understand and analyse it has proved to be much more complicated than many people were expecting. In the end it is a big surprise that such market investigation and analysis hasn’t been established much earlier, but as we all know, in most companies the decision about purchasing is pretty much taken by an individual and they have kept the reasons in many cases to themselves.

We sense and hear about more and more companies trying to get a more transparent and professional view on raw material price movements. External consultants are hired or the purchasing department is asked to make reports on how raw material prices can be better influenced, controlled and forecasted.

For many this job is a big burden. Not only do they know it means a hell of a lot of work to collect reliable data, it is extremely difficult to rationalise information which is not available just from an official source somewhere. It’s also going to make the life of the person responsible much more complicated in the future. In the end he will be measured by his own forecasts. What used to be the secret life of personal networks, opinions and unofficial information shall now be converted into something that is presentable, controllable and reliable. That makes many people who are responsible for that increasingly nervous.

We refrain from making a statement on how successful the attempt is going to be, but there is no question that it is much better that people start to think more about how and why price developments happen, rather than take it as a personal gamble to be either right or wrong on the market trends. One thing is however true; although many will more reliable data to work on, it will not solve the problem of making the right decision and the competition between the players will still remain the same.

The split market it as much trapped in a narrow price range as the hide market. However we realise that with the low kill in many parts of the world, the supply of splits for protein and gelatine products is becoming tied again. For the coming months they too will be below normal in many parts of the world and a number of producers are pretty worried about how they are going to fill their productions with demand from the food industry. Consequently we understand that their interest in tests for and with alternative products have increased in the past weeks. Producers try to get ready and prepared for a possible shortage of raw material supply after the summer holidays.

With a certain time lag we see a similar situation in the skin market that we had already seen in the bovine section. Due to seasonal effects the price peaks had been established about a month later than in the hide market, but since then prices have been sliding. This applies in particular to those products which have been rising steeply to historical highs and which have undergone a major correction. This means merino skins and also good quality double face products. Most of the other articles have just seen very moderate corrections. With the upcoming summer season, we believe that there might a bit more correction potential, but in the end not really too much with the supply side being well in check as well.

For the coming weeks we have very little reason why a new price trend should be established. We continue to believe in more adjustments between articles and origins rather than a trigger for a new direction. The summer holidays in Europe prevent from an upside move and the order books and the reasonably short inventories from any substantial decline. However, the market seems to develop into a more sensible situation now and we think that in particular the supply side should be watched carefully. Bovine slaughter is not what it should be and supply could become an issue again when a larger round of replenishment buying would take place. On the other side of the coin one can’t be sure yet that the tax investigations in China, rising interest rates and more leather substitution in the next season could have a reverse effect too, but this might happen later in the summer.

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