Market Intelligence - 07.08.12
07/08/2012
Is there anything of interest other than the EU debt crisis? Is the world possibly facing other challenges, success stories or problems? At least for those of us in Europe it seems that there is only one thing driving the future of the globe and it is the debt crisis.
It might have a major impact on the general economic situation, but questions are now being raised about this being a local rather than a general problem. If we believe that, even with all its imperfections, the markets are still the best indicators and at least in recent weeks the markets haven’t seemed to be paying too much attention to the daily news, drama and crash prophecies. This may be a good thing.
Travel overseas in the past months shows that people are watching, and depending on which business and environment they live in, the attraction of and interest in Europe and its problems are mixed. Is this a surprise? Not really. As much as we live in a global environment and as much as everything is connected, many regions have emancipated themselves from their dependency on Europe and the US. Many in the emerging markets have developed enough confidence these daysto be far less scared of the problems of the old world than before. Some are even displaying the confidence that their business and political concepts are superior in dealing with the challenges while Europeans fail to strip the fat away to become an elastic, flexible and successful region again. Well, they are certainly ignoring their own problems and social issues, but for the time being they might hold the better cards. The impression Europe is giving in public isn’t really impressing anyone and individual concerns in the rest of the world are more focused on their own issues.
The markets have regained some confidence. Comments from Mario Draghi, the president of the European Central Bank, that everything will be done to rescue the euro, Spain’s next austerity project to save another EUR 100+ billion, and reasonable news from the US labour market boosted stock markets as August began. Also commodity prices rose with oil prices almost compensating for the sharp losses seen in May and June this year. The drought in the US is pushing up many agricultural product prices and this will show its effects later this year and in 2013. Floods in North Korea and the civil war in Syria are also increasing the demand for food for food aid programmes.
The currency market saw the euro finding a bottom above the $1.20 market against the US dollar and even bad news failed to entice investors into more sales of the shaken currency to push it below the ‘big figure’. With the ‘good’ news at the start of August, the currency rebounded quickly and rose back to almost $1.24. There are already voices that see the euro recovering to levels of $1.28 or $1.30, but we have all learned that the market’s mood is pretty volatile and things can change very quickly again.
Market intelligence
It is summer and this means the activity in the leather pipeline, with the exception of production in Asia, is slow. This is seasonal and nothing to worry about. It also means Market Intelligence has been in holiday gear since not much is happening at the moment.
The pipeline is, however, still dealing with the question of what to expect for the rest of the year. The debate began at the start of the second quarter with people discussing intensively the possibility of leather demand declining more than the reduction in slaughter and supply. In addition the low profitability of leather production was thrown into the ring too to explain why raw material prices would decline.
Very little has happened so far, though, and apart from some currency-induced price variations, prices have remained almost totally stable. Almost all minor corrections in the bovine section seen in the meantime have been erased again and we pretty much stand where we were three months ago.
Consequently most of the warning voices and pessimists have surrendered and begun begrudgingly to admit that the beef industry played a successful game in the second quarter and was able to prevent its market prices from declining; a pretty similar situation to that of a year ago. The beef industry has obviously improved its market monitoring and research to know how serious the threat of unsold hide inventory and price declines was and is. Its analysis was obviously that any declines in demand for hides was only temporary and that buyers would return to the market early enough to prevent any major market risk. Buyers in Asia have to come into the market four-to-six weeks earlier than their colleagues in Europe and were not able to wait any longer; they have triggered enough product flow in the past weeks to prevent any dangerous development of unsold inventory.
Although a lot doubts about the real position of sellers were still circulating, recent sales and the shipments the major suppliers were reporting have been enough to keep the position intact and it doesn’t matter if the forward positions are actually as large as many claim.
Decent business in raw materials always has a positive side effect. Our regular readers know that we have good reasons to believe that balanced stocks of raw materials have created inventory of wet blue hides in the hands of producers or traders. These inventories will now be much better placed in volume as well as in price. This will certainly be a comfort to suppliers before they depart for Asia in the second half of the month of August to visit clients there in advance of the All China Leather Exhibition in Shanghai on September 4-6.
The supply side is pretty clear at this moment and it is fair to say that suppliers have built up a comfortable position, on the condition that the general economic situation does not deliver any sudden negative surprises. It would require total buyer absence to change this within a short period of time.
On the demand side the situation is not that easy. Going the easy way, it looks simple. If tanners buy good volumes, as discussed above, it should be a reflection of good leather demand too. We still believe that this position is too simple and a number of facts should at least be discussed. Since there are no reliable statistics to show leather consumption and manufacturing we have to deal with the ‘guestimates’ and the information collected from the various sources speaking to us.
Volume demand for automotive leather has been, and is, rising. Volume demand for luxury leather has been, and is still, rising. Shoe leather and handbag leather demand is falling in the old economies and is steady or possibly moderately rising in the emerging markets (although we still expect more substitute material in forthcoming footwear collections). Upholstery leather demand is shrinking. Garment leather demand is shrinking.
The above applies for a timeframe of between three and six months. Considering the market share of the various leather types (about 15% for automotive leather, something less than 10% for luxury leathergoods, 55% for mainstream footwear and handbags, 15% for upholstery and 5% for garments) it is pretty hard to see any net growth in leather demand as a whole. A balanced market at this moment is possibly the most realistic situation and this is also reflected presently in the raw material market. For the rest of the year there are no indications that beef production will actually rise and except for seasonal influences, the projections are for a stable or moderate decline in beef consumption. We have to keep an eye on climatic influences, which could change the situation quickly.
For a medium-to-longer market outlook we have to deal then with expectations of the leather business. The premium automotive leather producers are seeing quite strong order books because the premium manufacturers are (still) running on decent car sales and forecast for the rest of the year. The rest of the consumer market outlook is grim in Europe, uncertain in the US and moderately positive in the emerging markets under the lead of China.
This is the present situation and it is also clear from the stability we have seen so far in 2012 that many players feel comfortable with this scenario.
One can easily see from the above how fragile the situation could become. In such a narrow range of opinions, markets tend be much more sensitive to changes because nobody is prepared for them. For the time being, the hide and skins market is being supported by the cheap money supply, by general investments in commodities and one can also determine the close correlation between hide prices and the oil market.
For the moment it is summer and many people are enjoying a holiday and the Olympic Games and don’t want to bother too much about business. We must wait for developments in the market in September and October before we draw the bottom line.
In the meantime, the split market is steady and has not delivered any quotable news. Skins seem to have bottomed out, and from a number of markets one hears about the return of the Chinese buyers after a period in which they were not buying much. The better prices are however still being obtained in the smaller markets like Turkey, which seemingly is not suffering from the high-priced inventories of skins and feels a bit easier about purchasing after the market drop. The price difference between ovine and bovine is still pretty large for our taste and needs to be narrowed eventually. All in all, prices are said to be steady or a few cents higher than a fortnight ago.
In the coming weeks we believe that sellers will just try to ride the wave and to continue their current momentum into the Shanghai Fair. They might put the price tags a fraction up to test and to bolster their positions, but we tend to believe they won’t want to gamble too much and will continue to take what is close and reasonable to keep inventories low and to hold prices rather than to push them too far for now.
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