German Perspective—17.04.12

17/04/2012

What happened this week: The situation is getting more mysterious every day. Superficially it is pretty easy: it seems there are still enough buyers around who are are in need of hides and even if they have to pay the asking price of the day. This may even be true for some specific materials, and due to the fluctuation in the slaughter here and there shortages occur. However, the $1 million question remains over whether this can be generalised for the whole market. The constantly repeated story of supply shortages cannot be proved by facts. Supply is not just what is produced, but it is much more what is actually made available to the market. We feel that this is presently the big unknown in the equation between supply and demand and the constant discussion in the trade: is the market really where it is supposed to be by the limited volume of trade seen over the past weeks?

For the moment suppliers are still entirely in control of the market situation and abattoirs remain pretty optimistic about the value of their major by-product. Indeed the beef business is pretty difficult everywhere. Live animals are expensive and the consumer is for various reasons not willing to pay the price at retail for beef. Returns for milk are pretty decent as well and so the farmers feel for the first time in a long time that they have the power to decide the price tag rather than have it dictated to them by their customers. With the profitability problem starting from the slaughterhouses everything is being tried to improve revenues and to prevent falling returns.

The leather business so far is still based on the past and not so much of what is going on today or must be expected for the future. The tanning industry is still thriving on existing order books and with limited inventories tanners as a group cannot turn away from the market for the time being. This is keeping sellers on the safe side and with enough business generated week by week, seriously increasing inventories can be avoided for them. Except, possibly, where they are created intentionally. However, in most cases players are pretty confident, that with the lower kill to be expected in spring in our regions constant demand will be strong enough until the summer holidays to clean up production and there is no need to stimulate demand by lowering prices. But it is just like leather to sit back and wait for the next buyer who needs to fill the drums and will in the end be willing, and forced, to pay the asking prices.

We have been pretty prudent since we have reached the price levels seen in spring 2011. We are running into a pretty similar market pattern to that of a year ago. Last year the market was able to hold reasonably well until the last quarter, but the general global outlook at that time was definitely better than it is today and the market correction simply came because tanners were not able to obtain leather prices to match the raw material price levels, the levels we are seeing again today.

It is not really important to bother about the coming weeks, up to the summer holidays, but everybody has to think seriously about what happens after that. An interesting question is if the present situation is actually already creating serious damage or if the leather industry can actually handle the present situation and start after the summer holidays with whatever the situation may be by then or if we are already laying serious grounds for financial consequences later this year.

In the meantime trading has been light in recent weeks. Not enough to get really worried, but certainly margins at the moment are totally insufficient. The customs investigation in China is keeping a number of buyers away from the market and those who are not directly affected are also waiting on the sidelines to see what kind of consequences this could have. Prices for premium hides in Europe have been pretty steady and for selected items even a fraction higher, but for the more standard products they were barely steady. The lack of sufficient shipping facilities is starting to make planning pretty difficult and shipping times are really extending now. With the upcoming spring and summer this is not particularly good news.

The kill: We are now starting the difficult time of the year. Holidays in the month of May will decrease slaughter further. Weights decline too and all this is not good news for production, knowing that beef demand is also slowing down.

What we expect: The market is pretty much trapped in the same range as has been operating for a while. International levels do not allow for any further advances, while the high quality and heavy hides are not in excess supply. These two parameters are paralysing each other and none can actually dominate at this stage. So it seems that we still have to live with the situation for a while. Only external factors like the customs investigation or financials might trigger a short-term change.

Type	Weight range	Avg. green weight	Salted weight	Avg. weight salted	Price per kg green weight	Trend
Ox/heifers	15/24,5 kg	22,0/23,5 kg	13/22 kg	20/21 kg	€ 2,10	Steady
	25/29,5 kg	27,5/28,5 kg	22/27 kg	25/26 kg	€ 1.75	Softer
Dairy cows	15/24,5 kg	22,5/23,5 kg	13/22 kg	20/21 kg	€ 2.00	Softer
	25/29,5 kg	27,5/28,5 kg	22/27 kg	25/26 kg	€ 1.70	Softer
	30/+ kg	33,5/35,5 kg	27/+ kg	29/31 kg	€ 1.60	Softer
Bulls	25/29,5 kg	27,5/28,5 kg	22/ 27 kg	25/26 kg	€ 2.20	Softer
	30/39,5 kg	36,0/37,0 kg	24/34 kg	31/33 kg	€ 2.05	Steady
	40/+ kg	45,0/48,0 kg	34/+ kg	38/40 kg	€ 1.90	Steady
Thirds	15/+ kg	25,0/27,5 kg	13/+ kg	24/26 kg	€ 1.40	Steady
Thirds bulls	30/+ kg	38,0/40,0 kg	24/+ kg	33/36 kg	€ 1.40	Steady

German Perspective—17.04.12 - leatherbiz: Lea

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German Perspective—17.04.12