Market Intelligence - 02.10.12
02/10/2012
The financial world is still in a state of turbulence and ‘investors’ are happy to take as much advantage from the situation as they can.
Despite the experience that the injection of more liquidity into the markets is hardly helping (except to boost the price for commodities and other assets), this instrument remains the top tool of governments and national banks. With clear signs of weakness in the Chinese economy the Bank of China has opened the tap and poured $45 billion into the Chinese economy as another ‘stimulus’. After all the quantitative easing in the US, from the European Central Bank and the Bank of Japan, China has now reached into the same toolbox to fight against a slowing economy.
There are actually very few regions in the world where the economy is still solidly expanding and the massive injection of liquidity in the past year, in combination with low interest rates, have so far only inflated asset prices and widened the gap between the haves and have-nots. Since Murphy’s Law (if something can go wrong, it will go wrong) also applies to the economy, the drought in the US and the focus on ‘bioenergy’ have supported food price increases.
At the same time, the oil markets are trading more on possibilities than on facts. With declining demand and increased production there is presently no shortage, but investors are successful in using ‘geopolitical risk’ and the Iranian nuclear programme to push oil prices up and to make it a lucrative investment. Even the Saudi Arabian statement that the government there considers oil prices to be too high and a threat to the global economy was not able to raise concerns.
The sharp drop of oil prices one afternoon wasn’t even considered to be a market move, but had to be a system error of a problem of ‘fat fingers’. Prices for oil recovered quickly and the gain for the quarter ending September 30 will be one of the largest in recent history.
The labour market in the US is still stagnant and despite a positive consumer sentiment retail sales in the US were rather flat for August. General business activity in the US was the slowest in four months in September, according to the reviews of the Institute of Supply Management. Consumers are suffering from high energy and petrol costs and the high price of food too. The threat of tax increases is also not helping spending either. Nike reported sluggish revenues and the impressive news was that in particular sales in China were lagging and creating higher than desired inventory.
In Europe business people were watching the Paris Motor Show for news and gossip. Although premium manufacturers were still trying to paint a positive picture it is known that even the big three in Germany are talking to their workforce about possible production cuts in the months to come. In particular Mercedes-Benz had to admit, that its sales of E and S class cars are well behind budget.
The currency market has cooled down a little. The dramatic enthusiasm for the euro faded a bit with some return of concerns over the debt crisis in the region. Further austerity programmes in Spain, Greece and Portugal were celebrated in different ways. The investors partied on the stock markets, sending the euro higher, while people out in the streets protested. However, it is again pretty obvious that the problem is far from being over and is just not making the headlines over the last few days; this is not solving anything. Even Germany faced a slight slowdown in the labour market in September. Economies will need a long time for recovery and the bad news is that things can still get worse before they get better.
The markets are waiting for the results of the US election and also for indications about the strategy of the new Chinese leaders. This might deliver more indications about what to expect for the economy and business in 2013.
Market intelligence
Those who look for stability will be pleased with the year 2012 so far. Price fluctuation has been extremely small, in particular in the second and third quarters.
Also the in the past two weeks reports and market members have been trying desperately to find the words to describe what is simply not happening. Market prices for bovine material are fluctuating in very small ranges and this has been the case since spring. Price stability for a few weeks is one issue, but for such a long period it can only mean that the markets are in or close to a physical balance. If there is any question over this, it is how this balance has been achieved, because it is unlikely that beef and leather production have suddenly found the exact balance between the output and the input of both industries.
Consequently it has to be the result of professional supply management and good communication in all directions. Handling such a situation and reaching such stability can never be achieved by individual companies on only one side of the table, but would require a formal or informal understanding between the major players at the table together. There might be disagreement about the level at which stability is achieved, but certainly no disagreement about the stability as such.
Considering what is required to handle the situation in this way it is even more impressive. If the trade being just physical is an advantage or if a futures market would lead to better tools for stability would need more scientific research, but futures markets tend to be even more volatile. Anyway, the market must have been already in reasonable balance. Major disturbances could not be managed in terms of finance and warehousing, the fine-tuning can always be done.
Exchange of faithful information, the willingness to invest in supply management and inventory, securing the necessary cash and warehouse resources, the discipline to follow the strategy and fair valuation of product values and the added value achieved along the production chain can lead to temporary balance, but it has limits too. Serious or long-term imbalances in supply and demand will test limits of finance, space and mental strength eventually.
Long term in our view would be a time frame of six-12 month, which covers generally one or two seasons and also the production cycles around the globe. We believe it is too early in the season yet to come to conclusions, but let us just collect some basic facts for our readers to assist them to develop their own ideas about this early stage of analysis. For the bovine sector we consider the following to be important.
Supply:
- Regional kills have been lower in Europe, the US and parts of South America in 2012.
- Beef consumption is presently hit by the woes in various economies (Europe especially) and is generally lower due to the weak performance in the western world.
- Beef consumption is gradually rising in the emerging markets
- Cost of animal feed is up, while beef prices stagnate. Feedlot farming is presently not lucrative in many parts of the world
- Slaughter could see a short-term rise with farmers liquidating stock, which could harm medium-term supply because immediate replenishment of the herd is unlikely.
Demand:
- The strong performance of the emerging markets after the crisis of 2008 has boosted the consumption of consumer goods globally.
- The flood of liquidity, fear of inflation, low interest rates has also attracted ‘hot money’.
- Rapid expansion of production capacities in many production centres has seen raw material demand increasing faster than finished product consumption
- The large industrial production units (tanneries) are less flexible in their raw material needs and look for standard raw materials available in regular supply rather than buying flexibly the ‘cheapest’ product
- Leather is able to benefit in many segments because the material covers luxury accessories, automotive, shoes and so on.
- Rising price for the material begins to reduce consumption and triggers material substitution, in particular at the bottom of the price scale
- The global economy starts to slow down
- Income and wealth have been less equally divided since 2008: there is luxury and expensive product demand (supporting leather), while the medium and cheaper consumer products look for the most economical material.
A key factor is also how the balance, which we have seen almost all summer, has been achieved. We assume it was mainly suppliers managing the market and willing to buffer whenever necessary. They were assisted by the some traders along the supply chain for their own sake and purpose, but anything that was too much for the market had been absorbed.
So we have to assume, that we have had a surplus market since spring. Not by much, and easy to handle, but real.
The above guide to the driving factors may offer guidelines for the coming season. From the demand side, the tanning industry is now entering its high-production season after the summer break. However, what the global consumer will want is still a pretty open question. Some believe that low interest rates will let people with money spend, while those without money are willing to borrow to consume. If that is not enough, there will be enough stimulus programmes to keep people spending. Expected inflation is another argument: excessive liquidity and the boom in commodity prices will eventually convert into higher consumer product prices so it might be wise to buy now while the price competition is still fierce and consumer product prices are still well under control. Products for everyday consumption might not fall into this strategy, but new upholstery, cars or any other big-ticket item could come into the consideration.
Others prefer rather the position that the downturn of the global economy, the EU debt crisis, the flat conditions in Japan and the stuttering US labour market will not be compensated by any better conditions in the emerging markets.
On the supply side we have to wait for the effects of the US drought and higher feed prices. There is a fair chance that farmers are getting ready to reduce their beef cattle herds. Costs to feed the animals are high, and food and energy prices may remain high. But beef consumption will also suffer.
So, there is plenty to think about and there are good options for everyone for the planning of the coming season. However, we think it is too early for a serious forecast, but never too early to evaluate the situation and to wait for the final pieces in the puzzle to fall into place and show the final picture clearly.
From the market in the past weeks there was not much to report. Sellers are still pretending to enjoy large sales and comfortable forward positions. However, available and public statistics offer different information. The high street shows in Milan and Paris were pretty well attended, but a number of exhibitors reported that they were missing some of the high-end brands in their visitor lists. We understand from a number of players, that even high street fashion names are starting to think about a reduction in leather consumption, although none of them is (yet) reporting any concerns regarding the sales budgets for 2013.
The split market remains pretty steady. Some talk about good demand and further support from the collagen market, others complain about falling demand from the leather industry. In total it seems however, that split as a cheaper alternative to grain, combined with the demand from the food and pharmaceutical industry, is still finding more-than-adequate interest to hold prices steady.
The skins market has now definitely bottomed out and, in Europe, there are even some improvements in price. Demand for average and better-quality nappa skins seems to be picking up and China has returned to the market. Prices went up by $0.50-$1 per piece and have left the low levels we saw during the summer. Turkey for nappa and double-face, Poland for decoration, and the Middle East for low grades; the market looks to be on safe ground after the collapse that we saw in the spring. Double-face demand from China is still weak, but this doesn’t seem to be worrying the market too much for the time being. Reports about a fall in the supply of skins in the next year(s) have possibly also created some more confidence, although several big Chinese players seem to be sitting on pretty high volumes of expensive stock bought in the first quarter of this year.
Next week the Chinese industry is mostly on holiday for the mid-autumn festival. Most expect a quiet week. The week after many will travel to Bologna for Lineapelle and Tanning Tech. The show in autumn is traditionally busier and better attended than the one in spring and offers early information about the coming season. Until then it is unlikely that the market will deliver quality information or decide on any new direction.
Share this story:
