Market Intelligence—23.08.11
23/08/2011
The show goes on, but in the negative way. In the past two weeks the financial markets have not settled down and concerns about the global economy, in particular in Europe and the US, have not gone away.
Stock markets saw a recovery some days, but it wasn’t sustained and after a few days of respite the decline continued. Many indices have lost between 20% and 30% since the turmoil started about a month ago. Many are starting to discuss if we are heading for a similar situation to the one in 2008. Well, the main difference is that in 2011 the market is already flooded with liquidity and this would not be an option again. So far the money flow is still intact with banks still lending money to each other. However, the situation remains pretty critical with a lack of clarity over what further problems in the debt crisis would mean to the private banking sector.
Excess liquidity is still looking for somewhere to go and this is pushing the value of precious metals higher. The gold price is soaring almost every day to new record levels and is now already eying the next magic mark of $2,000 per ounce. Some of the excess liquidity might be absorbed now by the melt-down in the stock markets, but there is still enough floating around.
Governments are still seeking for solutions to the present debt problems. Their only solution these days is lending more money, increasing liquidity and bailing out. This might be the comfortable way in the short term and it is supported by the vast majority of those responsible, but it is still pretty uncertain if this is the right way. While in the US they are still printing dollars, Europe is now in discussion about issuing euro bonds. It sounds easy and is comfortable for many, but it should be thought about carefully. The European Central Bank has already lost a lot of its innocence and independence by buying individual government loans. Let’s just hope they are not going to be used just as a tool for political interest and they don’t sell their independence.
Concerns are rising now all over and China is starting to worry about its US investments. China is not really sitting comfortable and inflation and the social balance are worries. This might need money too and so it is a headache if the domestic situation is threatened by foreign problems and the investments in US loans become more risky than actually intended.
Beside the falling stock markets and the rising price for gold and silver most economic data was pretty weak. If the international stock markets do not recover quickly and solidly they could represent a reliable indicator for an economic downturn or even recession. It seems that this is what we have to expect now and we can only hope that things do not become too bad.
Oil as an investment holds its price pretty steady. One would have expected oil prices to fall much further than they have done.
The dollar and the euro are bouncing between $1.42 and $1.45, weakening against safe-haven currencies like the Swiss franc and the Norwegian kronor for example.
Market intelligence
The leather pipeline is dealing with questions over the global economy and whether it is really heading for a new recession and if so, if that is going to have any impact on leather demand and prices.
There has been no change of opinions yet. There are some who believe that lower kills and the demand in the emerging markets will be supportive enough to hold raw material prices and the flow in the leather pipeline steady, while others believe that the global economy is entering a more difficult mode with negative effects on consumer demand and as a consequence also lower prices.
The main question at the moment is if the present market situation and prices reflect the market or if they are just a result of general interest. In many conversations we have had recently the concern was that prices might not reflect the market realities. We still believe there is a decent chance that the few public reports available show interest than real present market activity. It might be useful to go through this subject again because this could have pretty intense consequences for the market after the end of the summer break.
Why is the subject raised again and why could one be sceptical about the present publications? In recent conversations we have had with players across this market a number of people have shown a lot of scepticism about the public impression the market is presently giving. It is not really that they follow any particular individual interest, but they say that the numbers and the prices for many items quoted do not fit into their day-to-day experience.
Players are being very careful and sensible with any statements at the moment because a major and sharp market correction would suit no one at this stage. It is also increasingly complicated because there is no doubt that the market conditions for the different qualities and grades are quite different at the moment. This makes a generalised analysis of the situation pretty difficult and consequently there are market segments at the moment to suit every opinion. Almost everybody is happy to call the market steady all over because this causes the least harm.
The largest and most independent reports still come from the US. They have talked about large numbers of sales and only fractionally lower price levels throughout the whole summer. In Europe sellers also mention only small variations, which might be because of the very low volume of business and the strong confidence that heavy and good quality hides will find enough takers after the summer holidays and that demand from the automotive tanners supplying the premium brands will remain strong backed by large order books. Dairy cows are still the cheap alternative to the expensive lighter weight males.
Well informed sources question the published levels and are strongly convinced that a number of key players in the market are building an artificial situation to protect the market from turmoil, turbulences and volatility. Good intention of course, but we have seen such things a lot of times in the commodity markets and it has hardly ever worked. The only argument in the hide and skin market’s favour these days is the fact that we don’t have to deal with big financial investors and the future markets.
So, cui bono? As we have already explained a number of times almost everybody at the moment. Tanners still have the high priced hides from the second quarter and even with business not being profitable it is still much better to protect the existing market with a few more hides bought other than risking present leather contracts from being renegotiated because of a sharp raw material correction. The currency is helping in China, making raw material import in dollars cheaper, and with the domestic leather market in China doing much better than export sales it helps those who are operating domestically. Exporting manufacturers are singing a different song. Sellers see it pretty much a similar way. With the present turbulences in the financial markets the last thing they want is a market correction like we saw it in 2008, which cost numerous suppliers tremendous amounts of money through contracts not being honoured and the value of stocks being wiped away.
So it would be the best for all to maintain market stability as long as possible.
How real is the assumption that buyers and sellers can agree on steady prices for the vast majority of the raw material? Not very likely really. Volume manufacturers have been complaining since the first quarter about negative margins due to rising costs and high raw material prices. Even the moderate correction we have seen since late spring has not led producers back into the black and before the stock market troubles tanners considered a correction of another 10% as the minimum to find adequate levels again for their calculations.
Who would believe that leather makers in the past four weeks were willing to take any hides that were too expensive from the start? Well, either you get a reasonable deal, you get old expensive contracts re-negotiated to average or you get a safe promise that the hides you buy will be adjusted to market levels when they are shipped. All done with good intentions from all sides and nobody could blame anyone since it is all for the sake of market stability.
The problem with such arrangements is however, that they never work for everyone. To carry it out requires strict confidentiality, a certain volume to make it workable and worthwhile for the ones involved, good volumes of standard products and the financial position to handle all this. The club of players who qualify is not large and as long as they can generate the necessary volumes and publish the ‘right prices’ they are also taken as a reference for the non-members and the system works as long as the rest of the market is not forced to dump material and prices. During the summer months there is certainly less risk.
This makes the situation interesting for the coming weeks when all is focused on the trade shows and their results, the impressions people take from the All China Leather Exhibition in Shanghai, as well as the meetings in Asia either side of the event, and of course further developments in the financial markets.
Further economic problems will weigh on consumer spending and also on the general mood of businesses, at least in the Western World. People are getting worried and this is not really a surprise.
The split market is delivering mixed news. While lime split suppliers are still quite happy with demand and business, wet blue splits are facing more problems. In particular from the local market in China there is pretty bad news and a lot of tanners are complaining about poor demand and falling split prices. It is also a bit strange when one looks at the prices for cattle hides these days. The coming weeks will give a better indication of demand and if buyers are turning to cheaper material. It will also be interesting to see if the situation in the split market is also an indicator for the hides trend.
The skin market is still reasonably steady. It had already come down from the peaks seen in spring by quite a bit, but tanners have good stocks of finished material and are now waiting desperately for an early winter to move stocks quickly and at good prices and to receive follow-up orders.
The coming weeks will see more uncertainty in our opinion. Many are already starting their trips around Asia and reliable reporting might be less active with people not at their desks. The All China Leather Exhibition in Shanghai will be a big get together and market realities can hardly be hidden away. We still hope for a controlled and coordinated adjustment of price levels to get to a solid and workable level to start with in the winter cycle and we think it would be far more healthy if prices could be adjusted in late September and October to remove some of the price risk from the market and calculations in these uncertain times. Until then it seems that the policy of price dressing might be dominating, and the next important step is to see if the money and payment flow remains intact. Cash-flow is another strong factor and we see it deteriorating too.
Share this story:
