Macroeconomics

The last two weeks have again been not very exciting as far as the general situation on the financial markets were concerned. It is not really that nothing serious happens, it seems that the global community has become a bit immune to the regular flow of boring news from the same agents about the same problems.

In Europe the debt crisis has actually returned to the spotlight. The crisis was never gone, nor had it ever eased. However, in today’s world of excessive and quick news everything is forgotten if it is not mentioned again.

However, the worries about the Spanish economy brought the debt crisis back into the spotlight. High unemployment (in Spain almost every fourth person is unemployed at the moment) and a shrinking economy has increased the worries about the general situation. Refinancing costs of the country have gone up and one of the big rating agencies has downgraded the country substantially. This is not going to make the situation any easier. Suggestions to help European banks directly from the ESM are not favoured by the strong countries as they want to protect their tax payers from an almost unlimited liability of the problems of the commercial banks in the critical regions. This would indeed shift the liability from national government level to the European one for local private banks.

From China it was less the economy delivering the news, but more the politics. It is not easy to get a clear picture about the real situation in the country, but it is pretty obvious that there are intense conflicts within the Communist party. The fight for the pole positions after the next major assembly in October is on and the little that is coming into the public shows that the big players are fighting hard. The recent scandal about possible espionage on high-level party members in the city of Chongqing demonstrated how serious the competition is. China is always good for a surprise and we can only hope that the internal conflicts  in the end are not seriously hurting the stability of the country.

The currency and commodity markets did not show much movement. Almost all items are trading in very narrow trading ranges although one has the impression that the price levels in some cases are not reflecting the reality of supply and demand. In particular in the oil market the supply situation has eased significantly over the past months, although this has not been reflected in the prices apart from some minor adjustments in the past weeks.


Market Intelligence

We are again in a period where so little is actually happening that it would be  worthwhile to just copy the analysis of two weeks ago into this one. The fact is that the supply side continues to be in control of the market and as long as the beef industry doesn’t feel any pressure to stimulate demand by lowering prices we will definitely not see any serious change.

The demand side is lucky that at the present levels tanners are not showing any increasing need of raw materials and we are ahead of the low season of production. Otherwise suppliers would have become much more rough and ambitious. Consequently it seems that everyone is reasonably happy with a steady market although the tanning industry would admit that the present raw material price levels do not allow them any serious profitability. At the moment however, it seems that everyone just tries to finish the existing contracts, to reach the shore of the holiday season and to bother again about the situation after the summer holidays when they should have more clarity about leather prices and the future trend of international consumer demand.

The reports of the upholstery fair in Highpoint were reasonably positive. There were few complaints about the demand, but many complain about the prices. Upholstery retail prices in the United States do not consider any price increases for material or labour costs which have occurred over the last year. There is hardly any inflationary pressure and consequently  the big retailers are not acknowledging any need to raise their purchasing prices with the manufacturers. This applies in particular for the bread and butter main market models. As in other parts of the world, the luxury high end segment plays in a totally different league. That left a lot of the leather suppliers visiting the show with only limited hopes.

If one is really looking at the upholstery industry and the rest of the leather market then one has the impression that low price upholstery is a dying species. The price for leather upholstery below $1000 doesn’t seem to allow manufacturers to compete successfully for raw material in the present market environment. If the prices for upholstery leather are not going to move higher and buyers are not acknowledging the need for better returns from their suppliers, it is only a question of time until more of the upholstery leather manufacturers shift their operations either into other items or just reduce their capacities or close down.

From the shoe industry one gets pretty good reports from the fashion high street manufacturers. A good number of leather producers are reporting pretty mixed orders, but in general a significant decline from those shoe manufacturers which are mainly producing real winter shoes. Retailers in the Northern hemisphere are still sitting on reasonable stocks of shoes which remained in their inventories after the winter season and had to be put away for the next one. While it isn’t good for the manufacturers it might be good for the market, because the shoe tanners are also complaining that their customers have come to the end of the price ladder for good quality nappas and nubucks.

The automotive industry is presently delivering pretty mixed results. While the premium manufacturers in particular in Germany are reporting one record quarter after the other, many others are less happy. The manufacturers who are mainly producing for the countries in crisis in Europe and for the medium and low price market segment are starting to suffer. Car sales in this segment are significantly down. Ford,  for example, has announced that its factory in Cologne, Germany already lost 4000 workers. Also the French manufacturers as well as FIAT in Italy are facing serious headwinds and dramatically falling sales. Research companies for the automotive industry expect a period of declining and low sales for the coming three to five years.

The opposite is hard from the premium manufacturers in Germany. Despite high fuel costs and the uncertainties and the global economy they are still extremely optimistic about their sales potentials for the rest of 2012 and all of them are expecting another record year of sales in the premium segment. Well, they will have their sales budgets and forecasts from their sales people in the various markets and consequently good reason to believe in their crystal balls. However, if one checks the reports from the main markets, new sales could be disappointing. The order books for some of the models may indeed cover productions for some time, but in particular in China, which is accounting for the vast majority of the premium car sales, one sees a slowdown of interest and sales. The determining factor for the rest of the year is certainly the cars which are pre-ordered by independent importers and dealers. Several people report about the serious backlog of unsold vehicles still not custom cleared in the ports already in the showrooms of the dealerships waiting for customers.

However, production lines of the premium segment will continue to run at full speed until the summer holidays. German unions in the fight for higher wages have already threatened with strikes in the metal industry for the coming weeks. In case the strikes can’t be avoided anymore this might cause some interruptions and reductions in production. If this is limited to only a few days it will not slow down the supply chain and seriously hurt production, but if the labour dispute is not settled quickly it might touch production before the summer break. Opinions about how the situation could be settled are drifting apart. Some believe that due to the strong performance of the industry, employers will try to find very quick solutions even if they could be reasonably costly later on. Others believe that the strike would be the best thing to happen, because this would allow the industry to reduce output and it takes some of the pressure for sales off the manufacturers. The fact is, that a number of brands are already offering serious discounts to attract buyers.

As far as the raw material markets are concerned hardly anyone had to offer any interesting news in the past two weeks. Whatever you hear and whatever you read is still exactly the same as we’ve been hearing for quite a while. Those making the biggest noise are still the suppliers claiming extraordinary good forward positions and enough interest from the leather industry for their raw materials, so that they have no need and no interest to lower their asking prices. Quite the reverse; many of the peak beef producers are secretly already setting new targets for the raw material prices they are looking for. On the purchasing side it is pretty quiet and the tanning industry is not going public with its opinions and strategies. There is no question that the high end leather producers are still enjoying the best business, and quality and exclusivity still sells pretty well.

If there is any serious problem around, then we are talking about Hebei province in China. This tanning centre is famous for its raw materials which are saving the industry quite a bit of money for customs and taxes. With the recent investigations in the region a good number of tanners and importers have been jailed and the demand in the imports have declined substantially. Although this is only a small part of the global tanning industry in some parts of the business people feel the pain already. Everybody is asking if the business will ever return to normal. Many other players, if they are not jailed, have disappeared and change their phone numbers almost daily. Money operations are interrupted too and it is the big question if they can rearrange their organisations to settle the material waiting for import and clearance. If demand for raw material is actually still good in the country there will be ways and there will be other people absorbing the product pretty soon.

Apart from that, one hears about the activity in the tanning industry in the South of China, and all productions seem to be running full. Looking at the available statistics for sales and shipments it is still pretty difficult to believe the stories of extended forward sales, because the numbers cannot confirm the same. However we have  seen in the past that statistics do not always reflect the reality and maybe we are dealing with the same problem again.

The split market is still pretty much supported by the high raw material prices in general and the good demand also from the collagen industry. Only in China are there a few clouds in the sky.

The skin market was probably the only exciting market in the past two weeks. From the UK a lot of bad news came and land prices in the country were said to have lost about 20% to 30% of their value in just two weeks. No matter by how much, but it is no question that the prices for lamb and sheepskins have dropped and they are also dragging the other European origins down. The main reason is the problem in the Hebei province in China which is one of the main destinations for the skins. People are not taking their contracts, not paying for arriving skins and certainly not sending any new orders and the price levels we had reached at the end of the first quarter has brought a number of suppliers to reconsider their position and if our opinion that the market can only correct if sellers are trying to stimulate demand by lowering prices shown we are seeing that in the skin market at the moment. The skin market is known for its volatility, so let’s see how much pressure will be built on sellers in the coming weeks.

The next two weeks we still expect sellers to be in control of the market. Only sudden incidents like in the skin market could change issues short term, but generally sellers still feel so comfortable, that it will actually take a lot to change their mind. Buyers who know that they are still short of raw material for the short term should be on high alert. Apart from that we still think that there is something wrong in the data and market appearance and we have to see what that is. Anyway only the order fact and volumes for the next season will tell us the directions of the raw material market. The cash-flow situation in the trade should be observed too.

Share this story: