Market Intelligence - 03.04.12
MARKET INTELLIGENCE – 03.04.12
Macroeconomics
The financial markets are still offering a mixed bag of news. In the US the economy is showing some signs of improvement. In particular the labour market is presenting itself in a healthier state with unemployment declining slowly and consumer confidence slowly improving. Just Mr Bernanke, the chairman of the federal reserve, seems not to be fully convinced yet and the market was reading his statements that the time of cheap money supply will not come to an end soon.
In Europe it is still the debt crisis and the EU governments have finally agreed on an extension of their rescue programs. It has now been increased to EUR800-1,000 billion with the hope that this is going to deliver enough market confidence to put an end to the worries. Well, we can still hardly find anyone who thinks that this is the end to the story, with people in Southern Europe still out in the streets to fight against the austerity programs. However, the Euro has continued its slow recovery ending the last week at levels above 1.33 to the USD.
A great worry is oil prices. Energy prices have, like food, an immediate impact on consumer budget and in the Northern Hemisphere people are now expecting their energy bills for the winter. Although temperatures haven’t been too low over the winter, average prices of heating oil were significantly up and it is likely that in addition to the daily shock at the petrol station, some additional payments for the winter season will have to be digested.
At the end of the first quarter, investors can look back at a good start for stocks into 2012 with most indices climbing and isolated sectors like financials jumping high. Many start to worry how long this could go on, and the strong start could be followed by a flat rest of the year.
One can also read about worries of a hard landing of the Chinese economy. Real estate prices are falling and bad private and corporate loans could become a burden for the rising and shining star. Problems in China would not only be a problem in the region, but would also harm businesses all over the world. So far analysts and investors are still positive for emerging markets growth, but risks are certainly rising.
Market Intelligence
Well, so many – including us – were waiting for the gathering of the trade in Hong Kong, with the expectation of obtaining more clarification about the market, news from the leather pipeline and the further trends of the market. The personal meeting and the direct interaction between so many players in this field normally triggers far better information than all the internet and quick communication systems can do. Although everybody has access to all kinds of information these days the face-to-face meetings can still not be substituted.
However, we have to admit that we are a bit disappointed with the results this time. The number of people attending was possibly a bit less than in the previous years. While the overseas suppliers were almost complete, we realised that numerous Chinese visitors did not bother to come this time despite the great shopping opportunity in the city.
The main reason might have been that many had been visited already by their suppliers prior to the show, or in some cases they are still expecting them in the coming days.
As far as the news is concerned, basically there wasn’t any. Leather business tanners from China were admitting that their business in domestic China is still pretty decent while those producing for export were heavily complaining – not only about the volume, but also about prices. Side leather and automotive tanners reported normal and steady business while upholstery tanners are complaining. However, what is uniting all of them is the problem of profitability. Leather prices – despite some rises – are still not sufficient for the majority of them.
Although many are raising general concerns about consumer confidence in China, nobody sees any decline in general shopping in the country yet. The only exception might be in sales of luxury cars, where the newspapers are reporting that sales are significantly lower. A slowdown in this sector could mean something for the leather pipeline. Insiders are reporting the first indications that despite the record quarters, the big three automotive firms in Germany are reporting that order books for many models are now quickly melting away.. This could become true pretty quickly if the main driver of exports, China, is indeed slowing down. It seems that a lot of cars pre-ordered are now already stuck in dealerships and ports and it has to be seen whether sales will recover soon or other markets will have to compensate.
Another subject of intense discussion was the question of the steep rise of prices over the first quarter. Although we don’t fancy conspiracy theories, it was interesting to listen to alternative explanations than the only one we had heard since the beginning of the year – supply shortage – which is undisputable for some regions of the globe, but the extent was possibly overstated.
Well, some pundits discussed the possibility that after the sharp correction of prices in November/December 2011 speculative money could have been used and poured into the market. Used by players in the trade, but originally coming from other sources which had been convinced by the general strong performance of almost all commodities and a lack of other interesting investment alternatives to spend some money on buying hides. Upcoming Christmas holidays were followed by the Chinese New Year holidays and this kept the regular buyers (tanners) pretty much out of the market. They hadn’t been too convinced that the market bottomed and were hoping for further declines.
Those who are fully convinced in this theory even believe that it was a joint effort by larger protein companies and the investors (buyers) with the idea of creating a win-win situation. A speculative profit for the buyers and the chance for higher returns and revenues for the beef by-product.
In case this has any truth it worked well so far. When tanners realised that sellers were able to move some of the hides which had burdened them so much in the last quarter of 2011 and the hides could be bought anymore at the low seen in December they had to finally surrender and had no choice than to step in and to buy what was offered at higher and rising prices until today.
The question now raised by the pundits is whether the hides bought and shipped in December-February have gone straight into leather production - i.e., are manufactured into leather already or if they have just been parked in raw or wetblue in China and wait now for liquidation. Well, we live on stories, but some are saying that they have seen larger warehouses full of hides in China where the ownership and the destination is still pretty unclear. This story would also explain why not just the suppliers have a desperate need and interest to hold the market up, but also the position takers need the market to stay high to be able to sell the hides they bought and cash in the profits.
We will certainly watch and follow the situation, since we find the possibility that this could have happened extremely exciting and it would certainly be something new in the pipeline.
In the meantime we saw the big suppliers on the show being extremely stubborn with their prices and pretensions about the market. Export sales from the US and outstanding shipments are not giving too much faith in the stories and also suppliers from other origins were not overwhelmed by the volume of sales generated over past weeks when prices had reached the peak levels. So despite all the stories it is unlikely that enough hides had been sold to put all sellers in really comfortable positions.
It was not easy to obtain reliable information about the sales during the fair. People were pretty reluctant to supply information and those willing to share did not seem fully reliable. We had the funny feeling that a lot of information was just given rather for political reasons than as a fair description about the real selling success.
From those we trust most we got the impression that sales were generated, but just on subdued levels and at compromising price levels. They were mainly called ‘for the sake of the relation’ rather than the result of a real and desperate need to buy. The reduced number of Chinese tanners around were apparently visiting all the suppliers and asking for offers and prices, but in the end were not willing to accept asking prices and to a large extent were even bidding aggressively to test how far sellers would be ready to go. Sellers at the same time were listening to the buyer’s ideas just to turn them down. As already mentioned before, only in a limited number of cases were they able to find a mutual agreement to book some ‘fair business’.
In the end people were separating with both sides hoping to see things move in their favour over the coming weeks. Sellers believe that tanners still have a massive need to buy for the second quarter and it just needs patience and nerves to see them coming and finally accepting what is asked. Buyers watch the limited sales figures and believe it is only a question of time until sellers will have to surrender to move material and the price concessions will come soon.
Further information we obtained was that European shippers were complaining about the shipping situation. Shipping lines had cut capacities and the backlog from the Chinese New Year break is not yet fully cleared. In particular heavy payload materials have been left behind and this includes hides and skins. Many booked and confirmed container loadings have been cancelled and some even with the excuse of ‘captain’s decision’. At the same time carriers have lifted transport charges twice since February and this puts shippers in pretty uncomfortable positions. Not only that one never knows when the cargo is actually on the boat and travelling to its destination, but also that it can easily happen that freight charges are several hundreds of dollars higher, because shipping lines are not willing to transport at the original rate anymore.
Finally, profitability is a problem again everywhere. From hide processor to leather manufacturer, everybody is complaining about rising costs and negative margins and butchers are complaining about losses in the beef business, claiming that they need every penny from the by-products too.
Last but not least is the story of the shortage of supply. Leather producers too are scratching their heads about whether it would not be wise to re-consider their material mix for the seasons to come.
Summarising, the fair hasn’t been good or bad and hasn’t really given us the immediate and clear indications we wanted. If we were forced to give a final statement we would say that concerns were outweighing hopes by a few percent.
The split market is still benefitting from the prices for hides. They are the cheaper alternatives and have entered many productions already. Also the high returns in the collagen sector support the split returns and ease a bit of the calculation pains of tanners.
The skin market was a bit strange to us. While in the Middle East many producers complain about supply shortage and can’t find the skins they need, in other parts of the world skin prices are under pressure. The double face season in Europe hasn’t really started yet, but here the tanners get ready for the party of getting them. Easter is now right in front of us, which traditionally lifts the production and it seems that a clear picture about the supply and demand balance might be only possible after the slaughter levels have gone up and skins are really physically available for sale.
The look into the crystal ball is more difficult than ever before. The main problem is that there is no more regular trading with prices established on a regular base. The big packers of this world have started to ‘set’ prices instead of letting the prices float and it is today left to the smaller remaining traders and processors trying to establish prices, which the others then either try to follow or reject. We don’t think that this is really a good idea for a commodity market. Anyway, we are certainly now getting into the final lap of the ‘wait and see’ game we have been in for while. In the coming weeks we will certainly have to expect tanners or sellers to disclose their positions. Will tanners finally have to replenish their productions to make sure their drums roll in May-July or do they have enough inventory and fruit from reduced leather orders, so that they can stretch their stocks and wait? Sellers have to watch their stocks too and at least in Europe they have to consider that warmer temperatures are now ahead of us and also the shipping situation will still be a problem to move enough volume in the coming weeks.
Bologna will next week possibly also give us more insight into the situation of the European tanners and their ideas of how things will proceed.
We still fancy our idea about the fair value of hides and in view of the insufficient leather prices, the alternatives and the rising cost of transport and production we can’t see how raw material price levels can actually be held and so we expect the market to be ready for further prices correction.
