What happened this week: Another week has finished and we are running fast towards the end of 2011. The mood of the market hasn’t really improved yet. Actually the trade is waiting for the bottom but nobody is really in the position to find it. Most sellers are desperately pretending week by week that sales and market demand are strong enough to clear all the overhanging hides which are looking for customers, but so far not enough interest has been generated to make anybody feel comfortable about prices and the end of the correction process.

We are still dealing with several negative impacts. Leather demand has not met expectations and margins in the tanning industry have been negative for too long. A downward cycle is triggered by excessive inventories and insufficient demand, and this is what we are still experiencing now. Timing is an additional problem and the upcoming Christmas season and Chinese New Year are slowing down the product flow in the pipeline. Consequently people are now hoping for a better situation at the beginning of 2012 and we think that the majority of market players do not foresee any change for the better in the remaining weeks of the current year. However, trading has not come to a standstill and the few tanneries which are still running a reasonable order book are willing to buy into the falling market.

We continue to believe that the main problem was and possibly still is the overvaluation of raw material prices. The demand for leather at an unacceptable price level persists and only the exaggeration of prices in the first half of this year has caused the decline in leather consumption. There may be a lot of macroeconomic problems around, but as long as the global consumer is still shopping, that the production of hides and skins and leather could easily be absorbed.

So, we don’t think reduced consumption is the problem but rather the consumption of leather as a material. The rest is psychology but not really hard facts. The question we have to deal with now is whether the production cycle for leather demand can be stimulated enough before the material decisions for the next production seasons have to be taken.

Manufacturers of leather products have to regain confidence that they can purchase leather for an entire season at workable prices again. We are now actually in a good way and raw material prices are not very far from the levels which at least we would consider to be workable and reasonable. Leather which is too cheap is a long-term risk and so is leather which has become too expensive. From the timing perspective it is just a question of when the strong and large buyers consider the market to be attractive enough to allow restocking of inventories.

In addition, we all know that the key players in the global raw material markets, the Chinese, are actually not good buyers in a falling market. The bulk will only return when they see the market turning around. At the moment the bottom fishers are still successful enough to make themselves believe that next week they can buy at cheaper prices, and so they see no reason to increase purchasing volumes in the expectation that prices will rise again. The smaller players are just sitting on the sidelines and waiting. Consequently, trading this week was not really impressive.

The currency in our case was helping and some of the low bids taken when the currency was right and tough negotiations could be brought to acceptable levels. So, we would say that the speed of decline has slowed down, but it seems that there are still a few around who would like to know that the hides they own can be sold and turned into money. Prices were moderately lower, but the lighter weight males are still causing problems. Dairy cows and low grades move easier this week as people are just price buyers at this stage.

The kill: The kill was also pretty high this week, but not really anything unusual for this time of the year. The nights were cold and the farmers get good money for the animals and it seems too that the sale of beef is better than it has been for a long time this year. There is no indication that the kill will decline substantially in the weeks to come.

What do we expect: We continue to believe that there are still more sellers looking for buyers than the opposite. However, with a new price level established over the past weeks tanners have become more willing to secure raw material supplies again. This might not be enough to turn the market around, but the leather industry will appreciate it. We have still got to go through the difficult period of reduced shipments in the coming weeks, but by the end of the year buyers will have to decide how they expect their first quarter in production to go. So we might have to wait until then for the market to find a new and stable trading range.

Share this story: