Market Intelligence - 29.05.12
29/05/2012
The global economy is heading into the northern hemisphere summer and that generally means low season for news and trends. However, we are still in rocky seas and the situation isn’t getting any better. So, this part of this issue is going to be a bit longer than usual as the macroeconomics have a long-term effect on the leather pipeline too.
The EU debt crisis continues not only to be a threat, but the long-term consequences are becoming more and more evident now. Slow or negative growth, high unemployment (mainly among the young) are long-term effects that have been ignored for too long. The problem of not having created and developed competitive industries and economies is now such a heavy burden that it can hardly be managed, and certainly not in the short term. The new competitors in the emerging markets are not leaving much room, nor have they shown much mercy for the ‘old economies’ that have not been able to change.
From the political side the only tools pulled out of the drawer are the old and much repeated ‘stimulation’. This means nothing except pleasing the public, investing in consumption, failing to raise competitiveness and to continue the deficit spending that has been one of the real reasons in Europe why we are where we are today. We need ideas, new and successful products and services. To develop them, to market them and to turn them into jobs and growth will take a lot of time, time we have lost over the years.
It seems that people in good old Europe are still not seeing the problem. Politicians in our societies are very limited in their activities and creativity and just follow simple political patterns. The people in the street need jobs and companies see themselves in a global competition that is ruthless when it comes to cost and prices and simply doesn’t allow them to create enough jobs with the level of salaries required to maintain the standard of living many are used to. The biggest problem is the widespread unemployment of young people. They are the future, the creators, the drivers and if they don’t find positions to learn, develop and build from, the long-term problem is going to be far bigger than just the jobs and growth missing today. Let’s hope that Europe and its people realise quickly that it is time to stop wasting time with standard political discussions based on the hope that some magician is going to appear to solve the problem. It will need a common effort and understanding about what has to be done in the global environment. This has to be with creativity and flexibility as the most important qualifications, and the leather industry could be a good example. It has demonstrated, even in the most difficult conditions, that there is always a chance even when everything seems to be against you.
On the financial markets, it is obvious that the few core nations that are still doing fine cannot sustain the whole continent. The problem countries have to be brought quickly back on track and this is still far away because so far they haven’t even finished cleaning up the problems of the past. We don’t need to point at Greece the whole time; the problems in the banking system in Spain tell us that nothing is over yet.
A report last week from the Organisation for Economic Co-operation and Development raised serious concerns about the risk in Europe and the contagious risk to the global economy. As a reflection the euro lost more value and fell to levels around EUR 1.27 against the US dollar and the risk is rising at the moment that this level may not hold and the currency is set for further devaluation. The risk for the global economy is reflected in falling commodity prices and here too further declines would come as no surprise.
The Chinese economy is slowing as well and the markets were discussing the stimulation programmes of the Chinese government to increase growth rates again. However, it seems that the mainland is busy at the moment digesting the massive growth of the past few years and consolidation and adaption are more important at this moment.
Market intelligence
The leather pipeline continues to suffer from too much ‘politics’ and too little ‘market’ at the moment. We continue to believe that what is reported these days is no reflection of the real market conditions.
Public opinion and the trade talk deny price declines for raw material and only minimal adjustments are admitted. Well, one can put any price tag on a product, the question is just if the customer buys it. At the present moment it seems that not many are buying hides or leather and the response of the sellers is just that there is plenty of uncovered interest out there and it is only a question of time when the producers will have to surrender and come back.
Independent of the fact that production never stops and raw materials are always used, one should not ignore the other hard facts such as ‘how much is required’ and ‘how much is physically available’. We have been suspicious for months about this being a great project of the beef industry and possibly some other partners to camouflage the real situation and to use the general tone of the financial and commodity markets to ride the wave. We failed and still fail to determine the volume of orders and the price levels for finished leather to justify the market hype and the raw material prices. The two strong performers, automotive and luxury accessories, can influence but not entertain market levels for ever. Their final products and the added value situation is totally different from the mass consumer markets for standard leather products.
We have seen it with the majority of sport shoes; in the end you do not need to use leather to make the product. If consumers no longer view the product as being in the right price range they can’t buy them; but if other materials can meet the price targets nobody actually cares if leather is used or not. On the football pitches of the world only the veterans can remember the days when a football boot was made of leather. The youngsters care much more about the colour and the brand rather than the material. People should not underestimate how easily this story can be shifted to casual or dress shoes as well. If leather doesn’t attract more people to pay more money it will always hit the price wall and this will not be changed by the marketing strategies of the beef industry. Just remember the fashion of ladies’ boots in the past season.
What the beef producers can do and what some are already doing is to get involved in leather production, hoping and working for added value in vertical integration. However, they should not forget that this is not necessarily expanding the market size; growth in integrated production could (will) mean a decrease in their old customer base and what they build up on the one hand they will destroy on the other, while taking on not just the chance of added value but also the risks. We will follow the trends with great interest, but most likely nobody will turn the clock back or admit that there had been something wrong with their earlier theories and management decisions.
The whole discussion might contain one major error. Market reports are written, market levels and price references are sought, but it seems that they have become of no value. The prices reported lose more and more relevance because they no longer represent the majority of the market. In most of the organised and leading global markets the supply base has concentrated more and more and on average we would estimate that about 70 % of the supply is aggregated in a handful of suppliers. On the demand side we don’t see such a massive concentration, but also here we have dominating groups that are supplying huge brands or retailers competing in the same markets with similar products.
It is a very complicated subject to work on. Why? Let’s have a look at the various interests and motivations. A lot started with the general agreement of almost all larger producers and users of raw material that prices should be more stable and volatility reduced. In this respect suddenly all agreed, however what they did not say was that buyers and sellers have a totally different opinion of the levels at which prices would become stable. Stability is the aim of all, but stability at what level?
The higher official quotations are and the cheaper the big buyers buy at, the better it is for both of them. High official price listings offer the sellers the chance to justify their quotations with the remaining free market buyers and gives the big groups the justification and benchmark for their leather price negotiations. They get the special deals because they guarantee the product and cash flow on the condition that smaller competitors have to pay more.
For the leather pipeline this would have certain consequences. The larger players need only to fight for the ‘right and adequate’ price level for the season. The smaller players have either to compensate the higher raw material price with special products or they have to escape into less standard raw material to escape from the price problem and from the transparent price structure. We are quite sure this is already the basis for many in the leather pipeline or will be soon, and members would be well advised to analyse quickly their position and prospects if they have not already done so.
Raw material prices in the past two weeks have already shown a bit of a reaction to the fact that they had been ‘stabilised’ a bit too high after the sharp rises in the first quarter of 2012. Many are now scratching their heads over how to get things adjusted again without causing too much (economic) damage. For obvious reasons nobody has any interest in seeing raw material prices fall rapidly and sharply. The negative consequences would be rough, but how to get things in order now and to have prices for the mass production slide back to levels at which higher production costs, transport charges and the risk of the lagging EU economy can be compensated?
Well, people try. Independent of all reports and discussions, many raw material prices are moderately adjusting. The steps are small and the resistance high, but step by step it is beginning. The currency market plays an important role too at the moment and the weak euro and stronger US dollar have already shifted values by about 5% over the past few weeks. US suppliers are feeling the pain already with their European customer base who are now finding US hides totally uncompetitive, while EU suppliers are feeling a bit of relief from the price pressure with their hides becoming more attractive on the overseas market with every cent the euro declines. With the US market still being the trendsetter for the global market, a firmer US dollar generally means bad news for prices in the US.
We are just at the beginning of the trend and we have already indicated that we would consider a price adjustment of 10% from the peak prices neither surprising nor unusual. Prices had moved too high for the price of leather to be brought back in line, unless the leather industry get the consumer to pay a serious premium for products made from leather, but the average consumer finds little reason to do so. Next week a lot of people will attend the fair in Guangzhou and this get-together could offer us a bit more feel for what the retailers have in mind and how much leather will be promoted.
The split market is also feeling a bit of resistance now. At least in the leather pipeline. This might be just sympathy with the hide market but could also be related to the season. We are at the beginning of the summer and this is never a time of great activity. The food and gelatine industry is still a ready taker of lime product but alternatives are getting cheaper too. However, also in this field the summer is not high season and a clear picture will emerge in the autumn again.
The skin market is in serious trouble. China (Hebei Province) is suffering from high stock, low demand, falling wool prices and the investigation by the customs authorities. Except for a few specialities, the market is in serious trouble and despite price quotes and gossip, many sellers are presently not in the position to value their skins correctly. Business is very limited and prices hardly representative. The weaker euro is helping Europeans a bit but cannot cure the problem for them either. In particular the standard nappa garment business is causing the trouble and it doesn’t seem that the situation will be settled soon.
For the coming weeks we don’t expect any major change in the trend. The mainstream tanning industry has only two options at the moment to limit losses. Either it cuts production or raw material prices come down to see if this stimulates demand. The problems in the EU, which have been known for long time, have taken a lot of demand from the market and this hasn’t been as well compensated by the emerging markets as many hoped. There is a reduction in business and the outlook for an improvement in the rest of 2012 is not too good. The beef business may also not be fantastic, but there are still enough hides and skins produced. If prices go too high there are other materials that can be used instead. At the moment the market is moving as though it had a kilo of chewing gum under its feet. We haven’t stopped believing that raw material and leather with a fair valuation will be good business. If the market fails to take notice, the consequences will come later, but harder too.
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