What happened this week:  This week was pretty quiet. This is nothing unusual for a September week, as usually the summer break for raw materials ends at the end of September and not at the end of August. Normally, tanners are still stocked for the start up phase after the summer holidays and they wait with their new and active purchasing activity until October, trying to catch up with their clients first and awaiting the results of the large number of fairs taking place in September. The high uncertainty due to the situation on the financial markets and the ongoing troubles with the European debt crisis is still weighing on the hide market – at least on the mood of the tanners. Only the German automotive sector remains entirely positive with budgets for 2012 being impressive double digit numbers; higher than levels of 2011.

Productions are still running full and will certainly do so until the end of the year. However, with the general situation one could be also a bit more conservative about the outlook for next year. Budgets haven’t proved to be too reliable in the past. Everything is based on the hope and expectation that the growth of export of premium automobiles to the new economies will compensate for the expected flat conditions in the markets in Europe, Japan and the USA.

At this moment the situation in the leather market reflects as follows. Automotive is strong and secure for the rest of 2011, high quality luxury leathergoods are strong, but not peaking seen until the summer with leather a bit down. Shoes are just flat with massive pressure on prices and a clear trend to keep shoe prices under control by using less leather, or alternative materials. Stocks at retail level are high and retailers are waiting for clear indications for autumn sales. Upholstery is pretty weak with only small niches showing a reasonable performance. With raw material supply in various parts of the world being down, many suppliers are still optimistic that the resistance of tanners will break due to low inventory positions. We have never shared this optimism and we still see far fewer hides sold and bid for than necessary to be convinced of a success of this strategy.

This week the EU market got some shelter from the currency situation. The EURO fell by more than 3% and lifted a bit of the pressure seen for a while. However, in our opinion the biggest problem is the fact that the market hasn’t found a secure level which makes leather production profitable. Too many tanners suffer from margin problems and more and more decide to cut production rather than increase their losses. The demand is also not evenly spread, either for high quality leathers or cheap material. The average type of hide is suffering. As usual, the top grades are too expensive for the economical section.

The poor news from the economies this week finally triggered the courage of tanners to pull back. While EU tanners still had some mercy, Asian tanners were far more aggressive and withdrew many of their bids. At the end of the week sales added up in smaller numbers and were mostly related to tanners in the region renewing some of their contracts or just buying a bit, hand to mouth, to cover the minimum. Despite many saying that dairy cow hides from Asia were still decent, we did not see many buyers around willing to pay asking levels. Maybe they will reconsider their position next week if the currency continues to support the prices.

The most problematic part of the market remain the males up to 40 kgs, which are simply overpriced within the global price range.

The kill: The kill was reasonable again this week. However, we don’t like the mix. Despite the announced export orders, the slaughter mix is only favouring dairy cows at the moment. The proportion between males and females sees a strong domination of cows at the moment. 

What do we expect: In our opinion, the next week will see: a) further resistance of tanners and aggressive attempts to bring prices further down and b) a new price structure and market scenario due to the extended moves in the currency market. Without better news from the economies we believe that tanners will now be more cautious and the next break point could be the Fair in Bologna in mid-October. At this stage we maintain our scepticism and see prices rather eroding than recovering.

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