Market Intelligence—13.12.11
13/12/2011
There is still very little from the financial markets that is not dominated by the EU debt crisis. The actual godfathers of the economy, the ratings agencies, have threatened the remaining EU members of downgrading their rating from top levels, which would increase their financing costs and consequently not make any rescue plan for the euro any easier.
Getting away from Europe one could also get a bit worried about the situation in China. Export growth and industrial manufacturing is slowing (not a surprise) and the potential problems for the Chinese economy are hitting the news more and more. There are concerns about the real situation of the Chinese economy and the potential risks. More lay-offs, a falling real estate market, the shadow market of private loans and medium-size companies failing are starting to paint a pretty grim picture of the real state of the economy. People out in the street are starting to worry and anyone who has bought property recently is already afraid that the value could decline and not rise. Inflation is now falling, which could offer further room for monetary easing and people are hoping that this could stimulate and support the global economic locomotive again.
Some of the luxury product shops in China as well as luxury car dealers are openly complaining about shrinking numbers of buyers and more credit than cash business. Many are hoping that Chinese New Year shopping can stimulate sales again.
Market intelligence
The situation hasn’t got much better since our last report. Prices continue to slide, although the speed has slowed down a bit. With the upcoming end of the year and the break in China a few weeks later things are still pretty slow and manufacturers are not yet willing to commit for the first quarter of 2012.
There is a lack of leather orders and although there is a lot of conflicting information about the inventory situation of the tanning industry, the time for tanners to replenish their stocks doesn’t seem to have come yet. Prices have slid to levels that can be considered close to the long-term average and they are definitely not yet at bargain levels. Buyers feel the uncertainty of sellers and so they don’t see any serious reason to step into the market since there is still the feeling that prices could ease further.
This is underlined by the information that a lot of suppliers are travelling in Asia and this is not considered to be a good sign. Without any serious reason one would not expect shippers from the US and Europe to catch a plane and to see their clients at this time of year. Many assume there are a lot of issues regarding quality and higher-priced contracts and until these issues are sorted out the market has also little chance of settling down.
We had been of the opinion that the bottom of the market would be around 5%–10 % below the levels of the past weeks and we are sticking with this opinion, but it is a question of how desperate buyers are and when they have no option other than to buy they will take what is available on the market and restore sellers’ confidence again. The main problem is the uncertainty about leather orders, related to when, how and if the euro debt crisis can be settled.
At the moment the problem is the financial side. Banks need to strengthen their balance sheets too and so they are checking carefully the loans and business relations they want to keep and their issue is certainly not to extend any credit lines at the moment. At the same time revenues are falling and the arrival of expensive raw materials is stressing the cash-flow of the industry. Consequently one hears about payment delays, but fortunately not yet of any failure. The next obstacle will be the time after the holiday season when tanners are again burdened with reduced revenues and a couple of weeks in which they are missing turnover making cash-flow difficult a couple of weeks later. Everything is still quiet, but one can sense the stress and uncertainty in the trade.
All the above generally applies to the commodity and volume productions where leather is just one option of the materials used. The few niches which have done well already for so long are still performing much better. Top quality shoes, accessories and automotive are still running at higher and better speed and consumption of the wealthy hasn’t been hit that hard. The are many who are also starting to be a bit more sceptic about the future, but for the presence high quality materials are still selling much better and prices are consequently not seeing the same pressure as for the commodity items. Also cheaper raw materials are performing better in relation to the rest. The pressure on leather prices and the cash-flow issues let a lot of tanners downgrade articles and productions and buy more economical raw materials until the more expensive ones are adequately priced.
All the above is aggregating to a difficult and dangerous cocktail. We all know how sensitive markets can become if there is a lack of confidence and we have seen a constant decline in prices since the beginning of September with no obvious recovery in demand or improvement of the situation. We are actually in the middle of the season, at least for upholstery, and it is pretty unlikely that the first quarter is going to see any improvement.
In the shoe sector the situation is a bit better with production for the next winter season starting in January or February. However, a lot will depend how the present stocks are cleared and although a bit of winter weather has arrived to the Northern hemisphere it might be too late to clear what is sitting in the shops and waiting for clients for this current season. The number of early sales and discounts all over is impressive and retail and wholesale will be far more cautious about placing orders compared to last season.
A lot will depend on consumers in the emerging markets too. China’s growth is slowing down, which will affect almost everybody around the globe. Officials in mainland China are still trying to make us believe that this is an orderly and desired retreat, but speaking to people in the street and to business people one can sense that they don’t like the idea of problems and a slowdown after all the brilliant years, but their concern is rising. The reduction of export orders was compensated for some time by domestic growth, but many are not so confident any more. However, we should not be totally negative. At the moment the market is driven by concerns. This always happens when prices of been high, like they were until the summer. It took months for the market to correct itself. It is also true that it is much easier to ask higher prices for a product one hasn’t got than to find a buyer for a product that has to move and that the buyer doesn’t want.
It seems at the moment that we have to decide between two scenarios. Either we are now falling into a another deep and this time extended recession as a consequence of the debt crisis in the western World (which will hurt and create a massive problem in the emerging markets too) or the dust will settle and the fundamental truth of limited raw material supply meeting rising global consumption and demand will take over again. For leather the strong performance of oil prices so far is good news. A lot of substitutes for leather depend on oil and while leather is now adjusting its prices many alternatives are not. This speaks clearly against any long-term price problem, but doesn’t protect against any short-term exaggeration like the one we have seen this year already. If one believes in the swing of market pendulums and the dynamic of the same, the market has to fall excessively before a period of stability can be achieved again.
So, one should actually start to think how far the counter-move can, should and must go. There can be no question that the counter-reaction we see now is not yet at the end of the swing. Hides and skins are not cheap yet. Why do we believe than after only another 5%–10 % adjustment rather than, say, another 50% that prices will be cheap again? Well, we actually don’t think that the economic situation will become as rough as the pessimists believe and secondly we still see leather as a material that companies want to use when calculations allow. Until there is a massive correction in other material prices there is no reason why leather should go down the drain.
So, medium-to-long term we think we the present conditions are not too far from fair value for the material and raw material resources, but with the present timing problem, the losses the industry had to digest in recent months and the cash issues that need to be handled, it could get still tricky for another six-to-eight weeks.
What at least in Europe plays an additional role is the high seasonal slaughter in the last quarter, which will fade in the first quarter of the new year. If we are really heading into a crisis it will hit beef consumption too.
In the meantime raw material prices have now come down by 10%-20 % and there are still some inventories shippers would love to clear before they feel happy again. Until they are moved and have found a home at whatever price they may fetch, it will be difficult to settle the market as such materials will always hover around like a phantom and not allow to let the market to settle down.
The split market is starting to get drawn into the hide market whirl. Almost the same conditions apply with buyers being reluctant to pay prices and preferring to wait. Just the collagen market and some high quality niches (belts and other veg tanned materials) are performing better and continue to support the situation.
The skin market is also facing a lot of trouble in the nappa segment. There is news of non-paid arrivals in Chinese ports. Some orders are said to have been returned to origin. We have been unable to find out if this is a market matter or if the goods are some of the ‘miracles’ that certain lower-quality origins are selling under different banners only to have been discovered by the final buyer before arrival. Whatever it is, it is burdening the market and has an effect on prices. Nappa skins have lost $1-$3 per piece, while double-face and fine wool skins are doing better.
We can’t really find any reason for thinking the end of tunnel has already been reached. European buyers will not be active any more and might just make their programmes at the very end of December or beginning of January. The only hope is for Asian buyers, who have a bit of a longer lead time, to come to the help of the market. There are quite a few who are saying that the inventory situation in Asia is not terrific and this would mean that buyers need to replenish stocks for arrival in February or March, which would mean shipment in January. We give this scenario at least a fair chance, with the consequence of more stability possible towards the very end of the year.
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