German Perspective—15.11.11
15/11/2011
At the same time buyers are revising their positions and expectations for the current leather season and have lost hope of a recovery of demand in the near future. With prices now being off their highs for most by 10% or 15 % the news has also reached leather buyers and they are now looking for price adjustments for leather if they buy any at all. These corrections are always painful and unpleasant, but it was and is part of the game and it doesn’t need to be repeated that the prices for raw material of the second quarter were never justified and the ignorance of the slaughterhouses and some sellers prevented prices from a timely adjustment.
When the correction does not happen in time it happens just a little later, but more pronounced. As bad as it may sound, we still see it as a simple and normal market correction. Raw materials have to be back in line with the leather prices and that is what we are readjusting now. Not for all products to the same extent, not at the same speed, but the operation is activated.
As the upside hadn’t been rational and hides were overvalued there is a fair chance that the downside will be exaggerated too. The biggest problems are all the overhanging inventories that are still sitting in various places. The next weeks will tell us if all the people who pretend that they had very good sales over the past weeks were really successful in moving stocks. If so, then the market has a chance to get into balance in the new year. However, sold or not, the next issue is shipment of the product. We are getting into the final lap of shipping opportunity for Asia and with the end of November it will get more complicated to convince buyers in China to receive shipments in January, at least in the second half.
The euro continues its yo-yo movements. When critical news comes out, it falls quickly but recovers as well when no further horror stories from the debt crisis are delivered. There is far more support from the markets for the euro than one should expect from the present situation.
As bad as all this may sound there is good news; we are in the process of price adjustments to market realities. The leather business hasn’t come to a halt and despite all the problems, the drums are still rolling and producing leather and the tanners want to continue. But at a constant loss? The product and consequently the price of the raw material has to be competitive and then it will be used.
Anyway, sales this weeks were not too bad if one was willing to find a compromise with the buyer. We had to say no to the horror bids some people were reporting, but we had to accept bids that were below the asking levels. Sometimes more and sometimes less. The Asian buyers were back in the market this week, but they are the most aggressive ones. Well, they have also more options. In Europe it is still the high quality material that is performing best, while cows for Italy for example seem to be pretty difficult to move. Also in Europe we are now walking in big steps to the Christmas break and most tanners have covered what they need for the weeks until the new year. So, it is not so easy to talk about raw material supply other than with the regular programme buyers.
On sales, one has to be satisfied with the volume, but not with the prices, because the never-ending story that abattoir prices don’t adjust quickly and adequately enough remains in place. The gap between serious market value and abattoir levels has become ridiculously high. Selling hides from the slaughterhouse is still a seller’s market no matter how grim the situation is. As far as shipments and letters of credit are concerned it is not perfect, but we cannot trace any serious problems. Maybe there are some open bills from the rising markets that need to be settled, but in general, the situation is all right as far as we are concerned.
The kill: The kill is good and normal for this time of the year. The Muslim festival of Eid al-Adha at the beginning of the week has brought decent extra numbers, but butchers say that beef demand has improved and they are quite happy with the sales. Also the next weeks should be good in volumes and we are hoping also for some higher average weights.
What we expect: We don’t expect the correction phase to be over yet. Certainly the market will not collapse and even a short bottoming can’t be excluded. However, the adjustment is not yet finished, but it seems we have already gone a good deal of the way. So, we would call the market now a weak-steady one, but the currency will be a factor too for the market.
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