Market Intelligence - 10.07.12
10/07/2012
In field of general economics and finance the most interesting news came from China last week. Positive media reports on the beige book survey were in conflict with weak and pessimistic official data such as the purchasing manager index, which came in weaker.
In the survey for the beige book report, domestic retailers painted a friendly picture of their business and expectations and also manufacturers were far more optimistic about their business than official data suggested. Exports may be down and outlook still pretty grim, but this seems to be offset by Chinese domestic spending up to now.
Also the real estate market, which was said to be weak showed the first gain in prices in the last ten months and businesses reported relatively easy access to loans, which is also in conflict with the restricted official credit policy to curb inflation.
In Europe the debt crisis remains without improvement. The summit two weeks ago saw some success for the Mediterranean leaders when they insisted on further easing policies and more time for structural reforms and less austerity. The markets were celebrating higher commodity prices and soaring stock markets, but that shows again the problem of the game and the vicious circle this is producing.
With easier and cheap money being pumped into the market it is the financial industry that is benefitting and neither companies nor private households have any real advantage. We already have an excess of liquidity in the market, which is – as money always does – going the way of the best investment opportunity. This is not investment in national debt nor in local businesses. It is investment in commodities, stocks and any other financial investment except loans, which is where the money is really needed. From the investor’s point of view: too much risk.
For private consumers the cheap money policy is a paradox. What is meant to be good for them and encourage them to spend to bolster the economy is propelling the cost of fuel, energy, heating and consumer products upwards. In other words it is driving inflation.
The problem for all the experts around is the same. They just see the big macroeconomic money game and the problems of the big players (banks and nations) and not the simple facts of daily life. This will one day hit back pretty hard.
A return to more socialist government is a reflection of this. These governments promise more and tax more highly, but this has historically never had any positive long-term effect on growth and the general success of nations. However for the normal guy in the street it seems to be the only chance for security if the state takes over for him. For the rest of the economy it is rather the opposite.
The fact is, that the fundamental problem in Europe remains unresolved as the gap between opinions remains too wide. The blame is entirely on the strong countries with Germany at the forefront. Hardly anyone believes that this gap will be closed for any compromise to develop. It is a vicious circle because whatever the decisions to handle the crisis may be they will separate European countries more than unite them. The present crisis has just displayed the big and existing cultural and political differences that had been camouflaged in political interest for a long time. The euro is now the victim, although the common currency has actually been the best achievement in the process while politicians have totally failed – in the past and now – to use the past decade to build what is needed to stabilise and justify a common currency and a political union. What they have messed up for more than ten years can hardly be fixed in a few months and it is a tragedy that politicians have destroyed a generally good idea.
The market rallies after the EU summit two weeks ago, the increasing political uncertainties in the Middle East, the strikes on the Norwegian oil platforms and the embargo on Iranian oil has boosted oil prices sharply and they gained about 10%. The euro gained more than four cents and then faded slowly again and returned to levels of $1.23 against the dollar, partly as a consequence of the (useless) rate cut of the European Central Bank last Thursday to an all time record low of 0.75%
All in all, the global outlook is still not positive and voices who see dangers for global growth are increasing.
Market intelligence
Actually the analysis at this time of the year is becoming increasingly difficult. In the western world and the northern hemisphere, companies are preparing for the holidays, which drags the rest of the production units into slow gear. With export demand for the main oriental production centres lagging, they are focusing more on domestic demand to keep all factories fully busy.
Our overview of the economy above points to problems that the leather pipeline is facing at the moment. There is a high level of uncertainty in the market about the outlook for the global economy for the rest of 2012 and also for the next year. This is influencing order plans and the situation today. Within the next two to three months the final decision will have to be taken about the supply of leather related materials and production programmes for the rest of 2012. The fundamentals are set. The premium manufacturers of cars are clearly stating that they expect record production and shipments for 2012 and new models will also keep leather demand high. With the lead times in this industry one can assume that even with a cooling economy the production numbers for 2012 are set and will most likely not be revised, or not enough to affect the pipeline in the coming months.
The luxury segment is pretty much the same. There is still the Christmas season ahead and the wealthy of this world still spend; there is no indication that they are too worried about their money. In the emerging markets buyers remain extremely quality-conscious and not only are the shopping bags of the Asian tourists well filled when they return from their trips to the US or Europe, they also still shop and spend at home. All luxury brands remain optimistic and continue to open new outlets all over China and in other prime locations in the emerging markets. Even if sales fail to meet expectations, just to put stock into the new shops guarantees a steady if not growing demand for prime-quality leathers.
The shoe business is a bit of a mixed bag. The fact is that at least in the western world shoe sales in the last season or seasons have been poor. A lot of stock is still sitting in wholesale and retail warehouses from the last winter season.
Standard shoes are suffering from the price rises in leather of the last few seasons and we have to watch and see what has happened so far to understand what is going to happen in the coming seasons if the price for leather cannot be adjusted. No matter if the shoe sales are going to be better or not, no matter if the stocks around will limit new leather orders for the next seasons, the quantity of (grain) leather is going to be under pressure simply for the reason of price.
Upholstery is certainly the weakest of all markets, considering that garments today play a lesser role in the production of bovine leather. Leather as a material is attracting less and less attention; it is no longer the symbol of luxury and wealth it used to be. The ‘leather lovers’ are still around, but generally it is no longer the target of desire of the lower and middle class consumer. Consequently the price factor is one of the key drivers in the market today and again only the luxury segment is independent of this and profits only from the spending power in the developing economies.
Looking at the consumer regions, we have to expect a weak performance in Europe where the debt crisis is weighing on the job markets and on consumer spending in general. It can already be seen in the sales statistics; European car sales are presently the lowest performers around the globe. The flat performance of the US labour market does not deliver too much optimism for consumer spending for the rest of the year either. So two of the major consuming regions are not sending out positive signals. All hope and expectation focus on the emerging markets under the lead of China, followed by the other BRIC countries and also the Middle East, where high oil prices in 2011 and into 2012 have supported the economies. With such close links in the global economy one of the most interesting subjects is how much individual regions and countries can decouple from the weaker trends in the US and Europe and even for the few strong performers in the EU the question is how long can they continue to perform well in exports when conditions are generally deteriorating around the world.
This is also the main question for the leather pipeline. Is the demand performance of the various markets strong enough to sustain leather production? And what does the global price structure for leather articles mean for the trend in prices in the raw material markets?
This leads not only to the question of supply and demand balance, but also to another situation we have been dealing with already for a while: the structure of the raw material supply base. Producers and large industrial manufacturers have taken over more and more the control of pricing. It is a network of strong interests, in which the players collaborate on the one hand because they depend so much on each other, but on the other they wrestle hard to move the price levels to their advantage. With good and consistent demand it favours the producer and suppliers (which is what we have been seeing for a while) while falling demand means either stocking excess supply or discounting prices (which is what we are seeing now).
The battle is not yet over, but we will know in September and October how the game ends. For the time being we think there is more than a 50% chance that we will see a repetition of the market pattern of the second half 2011. The market is always led by strong performers, which are the automotive and luxury sectors, but they do not represent the majority of production. That makes us believe that the sellers and producers use automotive and luxury as their benchmark. We doubt if this can work for the whole market.
Producers (beef companies) are flexing their muscles more and more. The new policy of the industry has been subject of one of our previous issues and we consider that as determining for the short-term price direction. Long-term it will not change much.
This leads to questions about how much we can count on the market information we got this year about leather production, orders and raw material shipments.
In the first quarter leather production was still high, but there is hardly anyone who is not talking about declines in the second quarter and also a decline of leather orders for the second half of the year. What is unknown in the equation is the global supply of raw material. The kill is down. Maybe not by much, but in certain areas beef consumption is down and for the time being it seems this will continue in the second half. However, we have the odd feeling that present demand for leather in total is not matching the raw material supply. The skin market may be a good example. It seems to us, that some hide grades remain well clear (automotive, high-quality hides) while others see stocks building up everywhere in the pipeline. This is not just at one level; it is not just for one type and it is not in one region only, but one can feel that there are more hides around than are actually needed or desired.
The split market is producing little news. Splits in general still enjoy steady and good demand. Collagen demand remains steady and the summer vacation period reduces the offer of lime splits by quite a bit. Consequently there is very little risk for the prices of splits at the moment and we think, that the summer period will be without much excitement or news.
The skins market cannot get out of the doldrums. The sharp drop in prices over the past four-to-six weeks has put some people in serious trouble. In particular, Chinese importers are sitting on high priced stocks in the low season and everyday rumours are around which speak about arrivals of containers in Chinese ports that are not being accepted, and deposits and letters of credit for high-price contracts are not arriving the way they should either. Also from other markets one can actually hear of more trouble around and slowly but sure also the last optimist surrenders. For the summer we have little hope that the market will recover and only after the summer vacation will we see, perhaps, a bit of light at the end of the tunnel. Prices are really attractive now and should enable producers to find good and acceptable calculations.
In the coming weeks we see the markets drifting further into holiday mood. Only from Asia can we expect interest if tanners feel that they need to cover production in August and September. The supply of raw material will not be exciting and we are very curious to see what the real leather orders will be for production in tanneries for the rest of 2012. We expect the raw material market to slide further, although suppliers will fight hard to maintain control.
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