Market Intelligence - 21.08.12
21/08/2012
The holiday season is still in full swing, the Olympics are over and the European debt crisis never ends. The financial markets are now enjoying the remaining days of the summer break. Some are already returning and are starting to sort out what they expect for the remainder of the year.
The main focus is still on the question of how and when the European debt crisis is going to be resolved and it seems that the politicians are now investigating the consequences of letting some countries leave the euro. In the media the feedback of the public is already being tested and the main complication is that the so-called political union will seem to lose some of its importance and shine. This leaves just the question of what the economic consequences will be and this seems to be something nobody is willing or competent enough to work out. There are plenty of opinions, but nothing really convincing as far as the consequences for the stability of the euro and the money of the taxpayers are concerned.
The next main issue in public discussion is the state of the global economy. Recent statistical data shows that emerging market growth is slowing down. The question is if the reduced growth is still good enough to prevent social tensions and to keep the Western world busy in exports to defend against major declines in their own economies. In particular the strong exporting countries in Europe, but also Japan and the United States need a strong performance in the emerging markets. China is concerned about the weak performance of exports, which is mainly the result of the European debt crisis. However, some other south-east Asian countries are still performing well as the result of production moving from China to cheaper destinations.
Another concern at the moment is rising food and energy prices. Food prices are actually a problem of the weather conditions this year with serious droughts and floods hitting the production of agricultural goods pretty hard. Rising production of agricultural products for bio energy is adding to the problem and is another example of political decisions that are rather driven by public opinion and fashion rather than a balanced view and analysis of facts.
Oil prices have been pushed dramatically higher since mid-June without any real justification in the supply and demand balance. Here we are dealing with rumours than facts and at the moment people are speculating about uncertainties and instability in the Middle East, plus some production cuts in the North Sea due to maintenance programmes. The actual volume of oil available and the outlook of the economy point to no short-term shortages and so the question is just ‘cui bono?’. For the investors it is a perfect world, with rumours moving the market and money in abundant supply at almost zero interest.
The international stock markets are doing reasonably well because investors will not only see raw materials as a safe haven but also the investment in asset-rich companies as an adequate protection against possible economic turbulence or inflation. Interesting in this regard is that not all commodities as an asset class can really benefit from the situation and this should be watched carefully in the future.
On the currency market the euro continues to be locked in a band between $1.22 and $1.24.
Market intelligence
There has been reduced activity due to the holiday season over the last two weeks, with the summer holidays and vacation in the western world and Ramadan in the Muslim world. The world is indeed bigger than just these two groups: there is also the southern hemisphere and some parts of Asia, and most of the information and activity came from these destinations, with a tiny shockwave in Europe too.
Germany as this second largest exporter of hides from central Europe got surprising information from China that the government in Beijing has decided not to grant any new import licences to German hides from July 31. This official information was wrongly understood at first by German officials and they informed the trade that an import ban on German hides in China had been imposed. One can imagine, with the importance of the Chinese market in particular for dairy cows, what this would mean for the industry and the quantities sold and produced in the near future would need to find new outlets quickly.
Fortunately it took only three days to correct the information and to figure out that all import licences obtained by tanners have not lost their validity and the big players who are in possession of extended import licences have received confirmation that their shipments and exports are not under threat. However, what worries most people today is the reason for the Chinese authorities’ decision and the conflicting information. Some reports say containers arrived at Chinese ports with wrongly declared German certificates. Others point the finger at general negotiations between China and European countries about health certificates. Negotiations have been going on for almost two years without any result, but it doesn’t really seem that this could trigger such an action in China and so we tend to believe the rumours of false documentation covering shipments from origins which would officially not be allowed to enter the country. From what we understand for people involved it doesn’t seem that the issue is going to be resolved in a very short time, but it also seems that there will be no significant harm to exports to China.
There are a number of cases also from other Asian countries where obviously fake export documents were covering shipments of questionable quality. A number of buyers in Asia are presently chasing suppliers in Europe and threatening legal action about quality issues and fake documentation. Speaking to people close to the subject, it is really surprising how much criminal ambition still exists in the trade. When you look at some of the problems, then you have also to ask why the buyer was so innocent as to believe that there was a supplier with no questionable trade record who could offer raw material so far below the market price. We can only recommend that they try to keep their fingers on these unbelievable bargains. There is still no free lunch in this business.
As far as trading and business activity were concerned, we saw pretty much the repetition of the past weeks. Suppliers are playing the market and squeezing prices higher with sometimes more or sometimes less success. Clearance of raw material is still good enough to keep any pressure away from prices, but on the buyers’ side some fatigue can be seen and many people report that the only buyers around are those who need replenishment at steady levels. Ask more and they just walk away.
Watching the number of sales it seems that the market continues to be kept in balance for the time being. Numbers killed, hides sold and shipped are declared in most origins to be in almost perfect equilibrium. Where imbalances are seen, they are corrected by buyers limiting their appetite or by sellers limiting their offerings and keeping their material. Both excesses are still limited enough not to really burden the price situation. However, it is unlikely that this almost perfect balance will remain. From the suppliers’ standpoint, they will do their utmost to keep the market stable as long as they can.
The fundamentals don’t look too good at the moment. Global growth is slowing down, food prices are rising, energy costs are high, cash-flow is tightening in the industry, profitability is low and the kill may rise because farmers are forced to sell cattle owing to a lack of feed or prices that are too high in some regions. This scenario is normally an indication of slowing demand and price resistance at retail and could be offset by a generally growing global consumer market as a result of spreading wealth. This is possible, with the trends in South America and Africa at the moment.
From the side of the buyers, the situation is a bit different because they are waiting to get the opportunity to ease the pain of higher raw material prices. However, this has to be offset by lower demand. With demand as it has been it is pretty difficult to convince the supply side to adjust prices.
Just another brief comment on pricing and the structure of the industry. We have been talking already about the question of the price reporting one sees at the moment and whether it is an adequate reflection of the real market levels. We doubt that and we continue to believe that the volume trades are taking place well below the official prices on lists and reports, at least for the big and core buyers. This points to further contraction in the tanning industry. For various reasons the tanning industry is moving in the same direction as the slaughter industry. From fragmentation to contraction with only some specialists being able to resist. This leads to less trading overall but to more trading among equals who have no reason to serve the business with market information unless it serves their interest. That the slaughter industry is bringing more tanning under its own roof supports this observation.
The split market is in holiday mood too, but generally still in good shape and this is related to the good and strong performance of collagen products. This is taking enough material from the market for the prices for leather related material to be well protected. The high price for hides is allowing the split tanners to obtain equivalent levels for split leather too. What fashion trends dictate in the next season we will see. On the food side we can hardly expect any decline either in prices or in quantity.
For the coming weeks we think there is nothing that can change the situation. Before the end of the holiday season and the trips to Asia hardly anything will move. The supply side is still the decision-maker and without any serious new indication they have no reason to alter their strategy.
So, let us enjoy the rest of the summer and relax before the autumn, which could be significantly more active.
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