Macroeconomics

The headlines of the past two weeks were dominated by the Euro debt crisis and the political tensions related to it. Finally last Wednesday the summit was able to present the solution and the ideas of political leaders who think they can prevent the Euro and the Euro zone from cracking and imploding as a result of the excessive national debts of various countries.

The situation of Greece was in the spotlight. The country has been rescued by a 50% bail-out and injection of new capital. In the end, the country is being financed with the same tools which are blamed to have created a great part of its financial crisis. After all these decisions were made, EU leaders were travelling quickly to China to try to interest the Chinese government in investments into the protection program.

The focus on the situation in Europe has taken the focus away from the problems which we also see in the USA and Japan.

After the decisions had been taken, the markets reacted as anticipated. Fireworks on all markets, with stocks jumping between five and 20% and in particular bank stocks in Europe were shooting up. In addition, the commodity markets gained again and what investors call ‘risk appetite’ was back. Well, one had to have a lot of appetite for risk if you thought that a lot had changed between Wednesday morning and Thursday afternoon last week. It is just another example of how irrationally the financial markets react these days.

The Euro also erased almost all of its losses which had occurred prior to the decisions. After having fallen to 1.31 just two weeks ago it finished the period back at levels of 1.40 against the US dollar which cannot be considered as a weak currency these days.

We have now seen how the markets are going to react in the coming weeks. It seems that their attention is shifting once again to the problems in the USA and Japan and it’s going to be very interesting what kind of interpretations the markets are going to use. It will also be very interesting to see whether a bit more of a sobering view on the situation in Europe will be taken. A little bit of an indication that things are definitely not completely solved could be seen by Italian bonds, which had to be offered with a 6% yield.

Although investors and possibly also a lot of citizens around Europe felt a lot of relief it does not seem that the problems are solved and that was not the last time we will have to deal with the problem of national debts.

Market Intelligence

The past two weeks were actually divided into two halves. Week number one was dominated by the leather show in Bologna. The number of visitors was pretty normal and the only thing which we would consider to be worth mentioning was the number of suppliers that were seen, who normally do not bother to come to the show. In particular a group of US packers who were on a tour throughout Europe spent some time at the event and that was definitely not just for the sake of gathering information about the latest luxury leather trends. After market prices have been held up for such a long time the headwinds in the decline in demand has actually worried a number of sellers recently and they were trying to use the show to obtain a better impression about the chances of selling hides at the prices they were trying to get ready for a long time.

Before we get further into the impressions and results of the show in Italy, we would like to deal with the position of a number of producers of hides and skins around the globe. It has been obvious for a long time that neither demand nor calculations of the leather industry are actually justifying the raw material price levels which we have seen since spring of this year. However a lot of producers of average quality material were stubbornly holding onto their positions and asking prices and it took far too long until they realised that the only effect they had created was a declining demand. Only in the past weeks have serious corrections started and prices slid week by week. The only question which needed to be answered was how far prices still needed to go down to find a level where the industry was willing to increase purchasing activity to levels which are sufficient to clean production.

The situation was certainly also influenced by the general economical situation and the concerns about the future of the global economy in 2012. We think, however, that the situation in the leather pipeline is actually pretty independent from the general situation. Leather demand is not really bad and you find a lot of tanneries and producers of good reputation and standard not at all complaining about orders and production. The decline in demand is mostly related to tanneries which have supplied the extra demand in the market which had been created after the crisis of 2008 and in view of the overly optimistic position a lot of people have taken for the outlook of sales of consumer products, in particular in the emerging markets. As long as this was combined with a strong order activity from the old and traditional markets, players who were betting on higher demand and possibly higher prices had the upper hand in the situation.

This year it started to become obvious that consumer demand will not fulfil the budgets and expectations. Alternative products were able to fit better in the calculations, so demand for leather and raw material slowed down in the pipeline, and the commodity quality level started to slow down.

As a matter of fact we still have shortages of material if we think about specific high-end products. It is just the price sensitive segment which is feeling the pain at the moment and the expectations have not been met.

This is leading us to the results and impressions which we obtained during the days in Italy. In the end it was something for everybody and every opinion and feeling about the market situation was expressed. The only ones who possibly happened to be disappointed were the people with bread and butter products, in particular in the upholstery section.

The show in Bologna gave confirmation that leather is a beautiful and quality material which is in the foreground of the finished product, and it is still finding enough strong demand from the manufacturing base. Luxury leathers with specific functions had another successful event and despite the discussion about prices and margins, there was not a single exhibitor complaining about the business so far in 2011. Quite the reverse in fact – a number of people were pretty satisfied with the results. If they had a concern, then it is just that raw material prices could possibly now fall too quickly and too low. We should never forget that the fair in Bologna might be a market place and meeting point for the whole industry, but in fact it is a pre-selection and a showcase for fashion and trends in leather.

Those who came to the show just for sniffing around and trying to gather general market information must have been disappointed. There were many more people trying to sell and find buyers than buyers who were actually searching for supply, and consequently many sales people found it was a pretty difficult time and most of them will have left the event rather disappointed.

The only exception might be the European suppliers of premium calfskins, which had to adjust their price ideas by quite a bit to attract their customers, even though nobody denies that premium leather made from this raw material can still enjoy good market potentials. We believe these premium quality skins will quickly find their homes again, but maybe the sellers will now understand that they should work in better cooperation with their customers and listen to their arguments before they trying to squeeze every last penny out of their material.

As far as fashion and trends were concerned we failed to see much new. Quality articles are still as natural as they can be although the colours are changing a bit for next summer. It is still the natural beauty of the material and the fantastic know-how and creativity of premium manufacturers which makes leather such a unique and desired material.

Although the event is not really a marketplace for upholstery leathers, there are still a number of exhibitors related to this segment too. For most of them the situation is pretty tough at the moment, with demand not being sufficient and calculations still pretty tough. Normally the upholstery segment is in the high season of production and tanneries are usually very busy from October until the end of the first quarter of the New Year. This year it was pretty difficult to find anyone who was happy with the amount of business and with the projections and budgets they obtain from the upholstery industry. This market segment probably needs the price adjustments much more than any of the others. Only a cheaper price for material leather can attract the manufacturers to consider more leather in their production again. The price competition at retail level is so fierce that for the volume needed to run the existing production capacities, only a lower price can help. The premium end is a different story and the wealthy people of this world are happy to spend a lot of money for furniture, but this cannot support the large price-sensible production capacities of industrial manufacturing of upholstery leather.

There is still very little to be said about the automotive sector. There might be a problem of margins at the tanning level, but premium manufacturers around the globe are still running large order books which are keeping them busy at least for the coming months.

Summarising what all this means for the raw material market, we think it’s fair to say that the actual top quality raw material suppliers have been pretty successful to get away with just minor reductions in their price levels. In some cases they were even able to sell until at least the end of the year so their worries about the near future will be pretty limited. For everybody producing lower quality, the situation was substantially more complicated and the show was not able to offer them a clear picture of how far prices have to come down to bring the market back into balance.

The situation may have changed a little bit during last week. With the possible solutions in the European debt crisis and sharp recovery of stock markets and commodity prices, it could well be that we see a bit of ambition in the market in the coming weeks. We do not believe that it is going to change the fundamentals in the market. But psychology can change things for a while. After such a long period of prudence and caution we might see some who are tempted to secure and replenish raw material inventories at present levels. It is pretty obvious that tanners still believe that raw material prices should fall by another 10% to bring calculations of productions back into safe and profitable relations. However, it is always wise to follow the falling market to make sure that the cost averaging principle is met.

The split market did not deliver much news. Good quality splits and specialties are still doing fine as they do in hides. Average and commodity type splits are still fighting the same price problem as the average and low quality hides. Splits at the moment are enjoying the benefit that they are a cheaper alternative and so they draw more attention for the running season of production.

In the skin markets we got the impression that demand has actually slowed down by quite a bit. For the double face markets the weather in the Northern hemisphere is still far too warm and retail is not really picking up. High-quality lining is still doing quite well, but nappas are facing a lot of headwinds on prices. Reduced supply all over the world is keeping prices more steady than they would be in normal years with normal slaughter.

At this stage it is pretty difficult to make a reasonable forecast for the weeks to come. We would not be surprised if demand stabilised and we saw buyers returning to the market trying to bid aggressively down, but in the end giving in and buying at the prices of the market. A lot will also depend on the currency situation. European hides which had been supported at the beginning of the month by favourable currency conditions are now looking pretty expensive with the exchange rate between the US dollar and the Euro. In reverse, American hides which had come down in price by quite a bit look much more attractive than a few weeks ago. So, unless European hides do not undergo another price correction they will have trouble competing on the global markets. Currency movements could change the situation pretty quickly again.

However, if in the coming weeks the currency exchange rates fluctuate within a narrow trading range, European standard hides will face more problems as far as price is concerned and American hides should be the first ones now to have a fair chance to find good support in the market and to stabilise their price levels. We don’t see in the near future any serious potential for a firmer market and a serious turnaround in the price trend. The next chance for a fundamental change might be coming in the second half of November when the Asian buyers have to plan for their time after the Chinese New Year holidays.

Share this story: