What happened this week: Everybody was focussed on holidays and a relaxed and easy period of a few weeks ahead of us. Tanners on vacation, kill low, market stable, the best of all worlds. Well, this was until Wednesday, when what had already been building on the financial sector over the past weeks like a thunderstorm on the horizon had been unloaded on Thursday. A decent stock market crash and a sharp drop of commodity prices wiped almost all market gains of 2011 out and raised quickly the question in the hide and skin market of whether the correction will be under way for our commodity as well. As usual there are different opinions. Most sellers lean back and believe that leather orders are still strong enough to absorb hide production and tanners will be still forced to replenish inventories, because  stocks are not allowing them to stay out of the market long enough to build serious pressure on prices. Others see the situation a bit different and fear that this earthquake for commodity prices will also spill into the hide market. Many tanners are not working with reasonable margins and so are they prompted to hope for lower raw material prices. The present situation is triggering and supporting courage to be more aggressive against the suppliers in the hope that sellers will be impressed by the situation and listen to ambitious bids to safeguard revenues.

For us it seems that not much has changed other than possibly the psychological factor.  Fundamentally there is not (yet) any change in the inventory and order situation. The order books of the German premium automotive are still as full as they were a week ago, domestic consumption in the emerging market is still high and the sales budgets of the big brands haven??t been corrected either. On the other side, beef consumption is not seeing the same growth and supply isn’t meeting the demand on budget levels for the rest of 2011. With most of the European tanning industry now on holiday the market reaction this week was still limited.

Tanners in Europe have finished their activities for the rest of the summer and the opening period in September and they don’t need to move and act. In Asia tanners reacted immediately. At the beginning of the week they were on the sidelines postponing most purchasing decisions until the end of August or till the Shanghai Leather Fair when they have the privilege to welcome global suppliers.

After the Thursday turbulences the situation changed quickly. Chinese tanners smelled their chance and started to bid aggressively down. Suppliers feel they still have time before reducing prices. For the time being and with the forward positions, reliable producers are holding this is true. However, if the international markets move we will have to move in the end. There is no question that the fundamentals are deteriorating. Payments from various directions are no longer arriving as they should. Tanners from Asia are not as desperate for shipments as they had been when the market was rising and one has to remind customers for one or the other L/C. In the end most of the pipeline is well filled, many have no serious interest in falling prices and so a far majority of the trade is not interested in lowering before the new season has opened.

The turmoil in the financial markets actually came at the wrong time. Trading activity was difficult this week. No interest or low price interest were the dominating factors this week. Until mid-week there was no real or serious interest. Second half of the week interest came in, but at low levels. It was pretty difficult in the end to make ends meet and to get some sales locked in. Most interest was focussed on either low grades or dairy cows. Males had to stay in Europe as hardly any buyer in Asia was willing to accept present market levels. Another important factor was the currency.

The kill: The kill remains low. In our region we are in the final lap of the holiday season. The kill is still pretty low and butchers are complaining about beef sales. This year there is no export beef business on the horizon like last year, which could boost sales and the number of hides. The kill should now moderately improve, but we don’t expect any significant rise in numbers for August.

What do we expect: Well, next week we have to wait first for the next reaction of the financial markets. If the markets remain nervous and the financial data from China next week is not going to be positive, we think that buyers could get the upper hand in the market. This might not include the high quality heavy weights, but the rest will get thinner. Without good retail sales and clearance the pressure on the market will slowly rise and a moderate correction would not be a surprise. Risk control will remain in our opinion be the most important issue and one should not forget, that sales can quickly turn into cancellations or re-negotiation too. So, beware.

Share this story: