Market Intelligence—26.07.11
26/07/2011
Well, what can be said at the moment? The financial world in the west is tumbling at the moment and the word ‘Armageddon’ is used frequently for the situation at the moment.
The US and Europe are tumbling into a debt crisis at the moment and no convincing exit strategy can be found. Politicians are unable to handle the mistakes of the past. Apart from the fact, that they now have to pay for what has been spent in the past, they are not willing to agree and to sell the decisions that need to be taken for the future. Contrary to the opinion of many decades, nations cannot spend more than they ‘earn’. They may borrow more easily but a debt is a debt and many have forgotten that debts need to be repaid.
It is easy. If you want to make more you need to raise taxes, if you want to spend less you need to cut expenses or you just do both. If the political scene in the democracies can’t agree on these fundamentals we continue to travel on the Titanic. In Europe it is even more complicated because a common policy on the currency is hit by national decisions on the budgets. It is quite understandable that tax payers from one country are not willing to pay for the past decisions and consumption of other countries, but that doesn’t solve the problem.
To prevent ‘Armageddon’ we have to act. So, we prepare more rescue packages in Europe. This is not solving anything, but just buying time. In the US a number of decision takers are also refusing to accept reality, insisting that what has been good in the past must be good for the future. Well, it seems they do not realise how much the world has changed in the past 20 years. This is what many have had to accept already.
The US dollar extended the trading range. Before the new rescue package for Greece was sealed the euro had a short knee-jerk day, falling to almost EUR 1.38 against the dollar, but with the package done it returned quickly to levels well over EUR 1.44 and now the US problems are dominating. Although nothing is solved the markets are just playing one problem against the other.
We saw a similar reaction for commodities.The safe haven position, in particular for gold and silver, pushed prices quickly back. Oil fell and went back to levels around $100 per barrel despite the concerns about the global economy.
Market intelligence
Owing to the holiday season this and the next issues of Market Intelligence will be a bit shorter. This may also have something to do with the tremendous silence one senses in the market at the moment.
One can almost physically sense how much players are struggling to find news or arguments for any opinions or new views on the market situation. This is also how the market is behaving. A little bounce to either side is answered with a similar counter-reaction. Reports of more interest and activity are followed by disappointments and slow activity. This has created an almost total paralysis and prices are not moving either. Even the record export sales from the US two weeks ago were not able to push prices any higher.
The only question one can raise is how much value the sales prices have and if they actually reflect the market values. We think that they do, but the volume of trading and activity is rather more worrying. The kill is well down in most parts of the world and this is keeping prices under control and making producers and sellers optimistic and certain about the market future. Tanners on the other hand see that they can hardly work profitably at present levels and have cut production down to the minimum.
From China we had a number of reports coming in of a number of tanneries that have cut their soaks down to 70%. Although this is not really worrying for the moment we should not forget that the domestic market in China has been one of the few positives in the business in the past months and manufacturers have at best still another three or four months to produce for the Chinese New Year shopping season. Shoe production is now working for summer 2012 and this means less leather is needed. So, apart from the never ending growth in luxury products, the demand side seems to be rather slow.
Australia is suffering from weak exports, in particular to Japan. Brazil is also far behind the records seen in previous years. In Europe the summer season is always slow and export contracts are unheard of. For the large producers in the US, the kill is about steady and this has kept sellers’ warehouses reasonably well cleaned up. This is supporting the position of those who believe that the raw material market continues to be supply-driven with demand not expecting any significant decline in the next seasons.
This will certainly be true if retail picks up strongly after the summer holiday season and retailers see their optimistic stocks clearing according to their budgets. Otherwise the kill could lead to higher beef consumption in the northern hemisphere and demand might suddenly not cope with rising supplies. One thing is certainly the case. Tanners still cannot find a profitable calculation and will consequently not buy in advance or replenish stocks to any higher levels than absolutely needed.
By the end of September production levels should have recovered to normal seasonal levels and the leather pipeline will have clear and reliable information about the orders and prices for the production period until the end of the year or even into the first quarter of 2012, which will determine purchasing strategy and decisions for the rest of the year.
Until then it is pretty unlikely that beef producers and traders will review and change their market views and pricing strategies. Since the correction in April and May prices have hardly changed and if at all it is for currency reasons or local influences rather than general price adjustments according to a change in the market balance. As a matter of fact we don’t see what could change this until the end of the holiday season or even longer. The only real market mover would be a sudden surprise in the financial markets as the debt crisis and its consequences become extremely influential in spite of the rescue programmes.
We have reported already that the leather pipeline has shifted its stock from raw to finished, and raw material levels can only react when stocks are pressing back which is not the case right now. It usually takes some months until raw material warehouses fill up again, so no short-term reaction can be expected. Only disappointing retail sales in the third quarter could actually change the fundamentals and the market sentiment right now. Nobody will take any notice until after the holidays and possibly ‘back to school’ sales will give the first indication of where we are heading in retail for the rest of 2011.
The split market isn’t reporting anything particular at the moment. With many tanneries on holiday or running slowly at the moment, not much is going on. Some demand from the gelatine and collagen side is reported and this will also become a factor again after the summer holidays with more demand from the food industry again.
The skins business has also taken a break. Some buyers are still around who failed to cover their needs in time and are struggling to find the product they are looking for. It is less a question of price than of availability. We are now entering the slow season and we don’t expect much to happen in the coming weeks except for some buyers to try to find bargains or sellers who missed the boat when the market was at record levels and have been waiting for prices to return to those levels.
For the coming weeks we don’t expect much change. Some people will be excited about the export sales from the US and the optimists will certainly take them as a confirmation of their opinion. Well, they might be right but they should also realise that prices haven’t move up last week when everybody sold so many hides. Could it be that a lot of the new sales were just re-sales of older, more expensive contracts in combination with newer cheaper contracts to bring average prices down? This would not increase the number really and would be just a statistical camouflage of the real situation. We find nothing really convincing at the moment to change our opinion that prices will remain within the current range, established for quite a long time now.
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