What happened this week: It was a very, very quiet week apart from the ongoing turbulences on the financial markets and the riots on British streets. The quiet period would under normal conditions not really bother anyone. It is the peak holiday season now and nobody would really expect much market activity. However, the recent turbulences have indeed shocked quite a number in the leather industry and everybody wants to know where things are moving before taking any committing decisions for the next weeks. Being also just four weeks away from the Shanghai Leather Fair, tanners in China now have the excuse to wait for the visits of their suppliers and customers to analyse the situation.

Most reports out of China are talking about increasing problems to obtain bank loans to finance inventory, and that margins are tight or even negative. Many summarised it as being better to do less than to lose money, and continue to reduce inventory wherever they can. What we actually see is pretty much a two-fold market in Europe at the moment. While the demand for heavy and high quality hides remains pretty good under the lead of the automotive tanners, the activity and the interest for lighter weights and standard materials is well below par and a number of players across Europe are starting to become increasingly worried about the situation. It’s also interesting that even premium calves are being offered by traders and collectors, something which hasn't been seen for a long time. So extra heavy hides are still cleaning reasonably well up, while other materials are facing more and more headwinds.

The market opinions are still drifting apart and it is easy to understand which interests are driving the positions. Most sellers and producers are trying to hold the market as steady as they can for obvious reasons. For a long time, butchers got serious support from the majority of the tanning industry which had the same intentions. However, the support is fading now. It seems that a number of tanners have used the past weeks or months to reduce their inventory position. With hardly any indication that leather prices will rise, they are now starting to look for lower raw material prices to reduce risk, cash needs and try to check if lower prices for raw materials and leather could and will stimulate demand for leather again.

With the very uncertain outlook for the global economy, the optimism regarding consumer spending continues to fade. This might touch luxury products less and the automotive industry later, but the bread and butter consumption of standard consumer products could be affected.

Another factor which we should see after the summer is the question of whether leather has been substituted by alternatives as a result of the record high prices of early spring this year. The new collections and the plans for the coming season should be clear or becoming clearer after the re-opening and the first shows are held. Until mid-October a large number of fairs are taking place and will offer us a lot more insight into the planning and expectations of demand and materials. At this moment, it seems that the gap in the performance between sophisticated and high quality items and standard products continues to widen. Things have slowly changed in the past weeks and although the financial markets have seemed to settle at the moment, it has been a pretty sobering accident. Many have realised that the world is not in the perfect order they wanted to believe for a long time. Today it is rather a question of how bad it is going to be.

Trading during the week was actually just bits and pieces and patchy at best. It was mainly ‘specials’ selling rather than ‘standards’. Asian buyers were almost non-existent like they frequently are when things are a bit bumpy. Further rumours about financing problems in China turned up and this was used as an additional explanation of why tanners are reducing stocks and staying away from active replenishment. This applies in particular to import and wetblue traders who predominantly feed the smaller domestic operations in China. Prices were barely steady, but required a bit of currency gamble to reach reasonable returns. 

The kill: The weather is really bad this year. This should actually lift the kill a bit and indeed the number this week was a bit higher. This might also be related to the end of the school holidays. However, it’s far too early to call it the end of the summer reduction and we will have to check what is going to happen next week. We believe that it will still take a few weeks to really recover.

What do we expect: In general we would describe the market as being in correction mood. However, the limited numbers of trade and the holiday season prevent for a real and fair judgement of where the real market is today. Nobody really wants to move and we assume that ‘list prices’ and real trading prices have already developed a fair gap. From today’s perspective it seems that most players have decided to lean back and wait until the holiday season is over. Most of the players will meet in Asia anyway to discuss the outlook and the appropriate decisions. Until then we think that prices will slide in the vast majority of articles.

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