Market Intelligence—28.06.11
28/06/2011
For most people in the financial world the Greek debt crisis is still the dominant subject, although hardly anybody knows what would be the real and serious consequences of any decision. So politicians met again to debate for endless hours, and many Greeks protested against the inevitable. Greece is bankrupt and the tax payers will in the end pay the bill for the sake of the European idea and vision, no matter how the decision-takers camouflage it.
The real problem is another one, which many people are forgetting. Firstly, Greece is just a synonym for common practice in the majority of countries, and secondly the Geek nation has now to pay for what it has already received in advance. Or better said, why are nations almost always spending their income in advance with experts telling them still that this is the right thing to do? The fashion of credit is pushing the consumer to buy first and (perhaps) pay later and countries to spend first and (never) get later. The tradition to spend only what you have is totally out of fashion and excuses as to why one should be creative at all levels are supported by experts up to Nobel prize winners.
Anyway, as one can see once again, it doesn’t work and the consequences are deep and problematic. Neither nations nor individuals learn from history and positive examples like New Zealand or Sweden at a government level, or the friend or neighbour in private life have not been taken as a warning and a challenge, but quickly forgotten in assumption that the deep needs of change will not apply.
The debt crisis is now well spread across the globe and reaches from the euro zone into the US, not to mention the large number of countries that always seem to be in trouble. It seems today that a large part the world will need some luck to get to the exit.
For the time being everything is still pretty much business as usual. Global growth is easing, but is still pretty solid. Most companies have half of the fiscal year behind them and their order books and forecasts show a pretty healthy year for 2011. Stock markets and commodities have deflated after their peaks in early spring and everything looks in good order for the moment. Some people see growth for 2012 declining, but fundamentally most players are pretty relaxed about the situation and those who are not directly touched by the debt crisis seem to believe that the problems are still far away.
The growth of the US economy is behind projections and remains weak. Quantitative easing (QE II) has ended and will not be continued with interest rates remaining at historical lows in the US. The European Central Bank has indicated it may raise interest rates again in July to stem the rising inflation. In any case one should still remain on high alert. Industrial production is slowing down in China. As much as the world is dependant on a strong economy on the Chinese mainland it will need to be watched, according to the latest news from there.
Oil prices remain pretty steady after Saudi Arabia expanded the output of oil to balance the missing quantities of Libya and OPEC could not agree on new production quotas. An interesting act also considering that Saudi Arabia was expressing worries that high oil prices could be a threat to global growth. They got a decent hit end of last week when the International Energy Agency decided to sell 60 million barrels of oil from its reserves to balance about 50% of the expected production interruption in Libya. Prices quickly fell by 5%. The worries about the economy must be considerable when such an action is taken and we have to admit that we share the worries for the future.
The US dollar has remained reasonably steady and the trading band was pretty narrow. Although the euro is quoted by leading publications to be a dying species it is holding up pretty well with all the trouble in the euro zone. Most investors seem to bet on the fact that some countries will have to leave the euro eventually and the core members will then represent an even stronger base. Meantime the investors are playing yo-yo with the two currencies, letting them bounce according to the daily news situation. However, at the moment it is like playing with fire near a petrol tank and it doesn’t seem that anybody has clear idea of what it will mean if things go wrong eventually.
Market intelligence
Since daily life has to continue, the leather pipeline is just dealing with the daily challenges of business. We are in something like a typical pre-holiday situation.
Tanners are trying to get ready for the vacation in Europe and productions in Asia are trying to prepare for the production cycle after August. With their longer lead-times they have to plan a bit earlier than their colleges in Europe. The shopping season for the Chinese New Year in 2012 will be a bit earlier this year as the Chinese New Year is at the end of January 2012 and not in February. That is squeezing the two biggest shopping seasons, Christmas and Chinese New Year, pretty close together and means that production and shipping activity should be at pretty high levels over a shortened period of time.
This could explain the reasonably high replenishment activity one can sense from China. The Chinese are playing the raw material market again pretty smartly. Presently they are purchasing more actively in the US, only in part owing to more attractive prices, and less in Europe. The fundamental idea is the hope that the European holidays will take the European tanners out of the market soon and force EU suppliers much more into the Asian markets for sales at, they hope, lower prices.
This is not new and has worked in part already over a number of years, but it seems to us that it could not be a successful strategy for 2011 in general. The kill all over Europe is pretty low and the premium qualities still enjoy steady decent demand. This has resulted in most areas in a steady clearance of material during the month of June and there are a number of suppliers claiming that they have already been able to clear their productions for most of the summer.
Not to be misguided. This doesn’t apply for all and everywhere. It applies mostly to the hides that are predominantly used by Europe’s premium tanners. They are pretty confident about their business for the second half of the year as they are mainly linked to the automotive and luxury product industry, which are still reporting healthy order books and expecting a strong performance for the rest of the year. The reduction of raw material prices over the past two months has improved their margins and apart from their raw material needs they are also not interested in any substantial drop in hide prices at the moment so as not to challenge their clients to discuss finished leather prices again. Consequently most seem to be happy to hold things as they are at the moment and are willing to absorb the hides that are offered to secure raw material supply and to hold the market steady. The hope of some suppliers that they could turn this into higher prices was clearly misplaced. Prior to the holidays tanners are not that desperate that they would need to listen to any higher levels at the moment.
The summer break is spread as usual. From Italy one hears about a longer shut down of the affluent plants in the north this year. This is interrupting shipments a week longer than normal and overseas suppliers are feeling it already. In northern Europe contract tanners are open almost all summer and a number of other facilities are said to be taking shorter vacations or to be working throughout the holidays with a reduced workforce.
Less prominent hides in Europe face a bit more of the influence of the holiday season and the silence from Asia. Eastern European, UK and Irish hides have not had not such a good performance and saw further declines in prices over the past two weeks. They look attractive in the international price scale, but Italian customers are only interested in deliveries for early September and the Chinese seem still to want to wait for better bargains before stepping in more aggressively.
Apart from the politics and strategy it seems that despite the fundamental optimism in the market there are also some problems underneath the surface. We hear from a number of sources from around the globe, that letters of credit are in some cases no longer as regular as they have been for a long time. This is apparently less down to clients delaying the letters of credit than about banks being more restrictive with loans and collaterals. Sources in China are confirming that the government policy to tighten credit to curb inflation is fully reflected in lending. The rumours about rising bad loans in China and also the local communities being in a pretty poor financial condition are also rising.
Anyway, so far the raw material market still in a pretty stable condition and plans for the rest of the year require a constant supply of raw material at a pretty high level.
All the above is on the condition that the debt crisis in Europe will not turn into another serious economic crisis. While some are seriously worried and expect a very negative effect on business and prices, others are taking a totally different view. Some expect that the debt crisis will not turn into a serious problem and that Greece will be rescued. Others think that the final failure of Greece could support raw material prices because the collapse of Greece would mean also the collapse of the European currency and it would be much better to own physical assets and raw materials than anything else. These people even believe that despite a serious crisis raw material prices will rise anyway as a response to the devaluation of the European currency.
Well, we see more risk than opportunity in the present situation of the global economy and we would not be surprised to face more surprises in the third quarter of this year.
The split market remains firm. More split is being used to lower raw material costs, while there is high demand from the gelatine and collagen industry, so the food industry is keeping demand strong with supply restricted in the summer months. There is hardly any indication of change in the situation for the coming weeks. In the medium term the split market will be influenced by the direction the global economy takes further into 2011.
The skins market is pretty shaky. New-season lambs in Europe, which had been pushed sharply higher in sympathy with all the other lamb and sheep prices soaring, are now falling as drastically as they were going up. It is the old problem that prices are quoted with no material around and with the slaughter season starting late in 2011 after the cold winter the market had been pushed with no trades. Everybody was talking, but nobody had any skins. Prices were quoted and it is easy to ask for ever-higher levels without creating any real basis for the prices with physical trades. Prices are down from over $20 to levels in the $15 range, with skins now being available and produced every week. It seems that also some odd lots are still around from the early season, smaller than the present standard, and these skins are quoted even lower. Tanners in Turkey and China are complaining that their expected orders did not come in the volume they had planned, which is also reducing demand at the moment. Some sellers have possibly also been holding skins back expecting prices to rise further and these lots need to be liquidated as well. Consequently it doesn’t seem that the market has found any safe ground yet and with the hot summer season now arriving, a bit more pressure would not be a surprise.
For the coming weeks we are being very careful with any predictions. Fundamentally the market is on solid ground with most important producers being well covered and running decent forward positions. Sellers will not be too desperate to move material and still see no need to stimulate demand by sharply lower prices. Buyers seem still willing to buy product, but definitely not at higher levels. So everything remains related to the general economy and possible influences from the daily news. Credits, money and the reaction of the consumer to what is going to come will also have consequences for the leather pipeline. While the summer could still be pretty steady and quiet, nobody would be really surprised if the autumn proved much more volatile and bumpy again.
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