Market Intelligence - 16.10.12
16/10/2012
The past two weeks have been a bit more quiet in respect of general news from the financial markets. The focus has shifted a bit to tensions in the Middle East, with the civil war in Syria and the complications at the Syrian-Turkish border.
The debt crisis in Europe continues to make headlines and it looks as serious as ever. The public has been dealing with the situation for so long that it seems the normal guy in the street is actually getting a bit bored by the endless discussions of politicians and bankers. More time, less time, more money, less money: in the end, people are pretty much returning to their normal lives.
One of the major ratings agencies has downgraded Spain by two grades and what would have been an earthquake in the financial market some time ago has been swept aside this time; the financial community has just shrugged its shoulders and returned to the daily routine.
The job market in the US improved a little and the unemployment rate fell to 7.8 %. The housing market is getting better with banks financing again. Low interest rates are inviting US citizens to refinance existing loans as well as to consider purchasing new homes. Banks are reporting rising business volumes and sharply increasing profits.
There is an increasing fear of inflation and more voices are being raised in warning. If the prices for oil and gold are said to be an indicator one has to assume that at least investors are considering the risk as pretty high. Gold prices were hitting almost $1,800 an ounce, not far away from record levels. Oil went straight up to $115/92 for the barrel despite fully sufficient supply and a generally pretty relaxed situation in the physical markets. However, investors are still playing the political card and the prices were explained just by the political uncertainty in the Middle East.
Stock markets were basically sidestepping with pretty narrow trading ranges.
The situation of the global economy is still uncertain and one finds a theory for every possibility. However, the general consensus is an expectation of a slow-down. It is still uncertain how the Chinese economy is going to react to the recent stimulus programme and what the outcome of the US elections will mean to the mood of the US economy. The EU debt problems remain unresolved and the strategies are still in dispute, which is also not really adding to any confidence for a general recovery of the economy.
Market intelligence
Most of the European trade travelled to Bologna in the past week in search of more insight into the situation of the leather pipeline. Exhibitors and visitors have to be divided into two groups. Those who are related to fashion and design for high street brands and exclusive leathergoods manufacturers, and others who are not the real target of the show, but either exhibit or visit anyway, because the leather industry as a group gets together on such events.
Organisers are trying year by year to keep raw material suppliers and other non-core visitors out in an attempt to focus more on key products, high-quality leather from top tanneries and registered clients. However, strolling down the aisles one meets every year the same faces. This can hardly be considered the visitors the Italian premium leather community is actually looking for and the filters the organisers have implemented seem not to work efficiently.
One can also debate about the sense of such a decision. The leather pipeline has always lived well and taking advantage from the integration of all, from raw to finished. Information is essential and in the end beneficial to everyone. Looking at the number of people around the show and realising that a number one and number three are usually not very well attended, it might be a much better idea to separate the days for different purposes. It is totally understandable when people paying a lot of money for the stands, investing a lot of time for the presentation of their goods would like to be totally available for their customers and not be disturbed by others.
So, why not have a day for invited visitors only, and two days general fair traffic for trade visitors? This would make better use of three full days and stretch and extend a little bit the congestion one finds in every one of the shows on the middle day.
The attention of visitors was pretty mixed over the three days. On the first day it started reasonably quiet and then over lunchtime until the early afternoon the number of people in the aisles was much better. The second day was full while on the third day the show was pretty much deserted and most people left pretty early. Generally the number of people around was also slightly inflated by technicians which were visiting the Tanning Tech exhibition and took the chance for a quick hop into the leather show.
The exhibition itself was actually a confirmation of the situation we have been describing for quite some time. Exhibitors who operate at the high-quality end and see most of their customer base in top brands in shoes and accessories were pretty happy. They received confirmation that, despite all the economic concerns, the wealthy of the world are still willing to spend their money on beautiful products made from this natural and beautiful material called leather.
As far as leather trends are concerned there was very little that was really new. Whenever one believes there isn’t anything further to do to make leather appear even more beautiful and impressive, almost every show in Bologna throws up surprises. We saw more natural leathers, we saw leather with magnificent touches, improved dyeing and little mysteries that made individual articles absolutely unique. Apart from the trend towards more classical colours and articles, a handful of metallic finishes were seen as well and some interesting artificial prints. All of them very elegant and impressive.
All the stands of the premium manufacturers were pretty full and a lot of designers and leather buyers were seen. Talking to the exhibitors and sales people, they all confirmed that they were very pleased with the number of visitors, the quality and the results. Most of them confirmed that they had good orders and their business is secure for the next months.
Consequently suppliers of top-quality raw materials were of the same opinion and with the limited supply of top-quality raw materials, tanners had to secure the raw material supply to make sure that they can deliver to their customers the material ordered and desired. With some of the high-end product manufacturers having become tanners themselves they feed their own productions.
The second group which was quite happy where the quality vegetable tanners, who have seen a decent recovery of their business; it’s not so long ago that many of these tanneries were complaining about their business situation and were so frustrated that many of them were pretty sure to close down if things did nor pick up.
However, the top end of shoes and accessories is, although a very important part of the industry, only a small percentage of the entire production. Tanners in the upholstery sector and also tanneries producing for the automotive upholstery industry in Europe were far less excited about the situation. Upholstery leather in volume is struggling and only the top end of the quality range is seeing a handful of orders, which are still never enough to fill the drums and production schedules as needed. The medium and low end of the upholstery tanning industry in Europe is suffering not only from a serious decline in demand, but also from the raw material price levels and the insufficient prices one can obtain for this kind of product.
There is negative news also from the automotive tanners in Europe. For almost three years the industry has had only positive news to deliver and it seemed to be an endless success story. While the middle and lower end of the price range saw serious declines in sales in 2012, the premium brands were thriving on exports and celebrating record after record of sales. Even in the month of September, the four major German brands – Audi, BMW, Mercedes and Porsche – announced new record sales and made announcements about achieving or breaking their targets for 2012. However, only weeks ago they were starting secretly to discuss with their labour force production cuts, news of which has reached the public in the last few days. Although not every model is hit and not every brand is influenced to the same extent, pundits are estimating the decline of production until the end of the year will be on average between 10% and 15%.
Consequently automotive tanners are using the production cuts to inform their raw material suppliers about their reduced needs and declaring clearly that not only will they reduce soakings, but also existing inventories will allow them to stay out of the market if their price targets are not met. What a number of packers and suppliers did not believe possible became quickly a reality. Show prices for all hides suddenly went down by between 10 and 15 euro-cents per kilo. This sent a clear signal to all other hide types except the premium ones and a number of sellers realised that it might be the time to reconsider prices and the outlook for sales potentials. By the end of day two more and more secret information was exchanged about deals being done below asking prices and the market levels of last week.
The price pressure came mainly from Europe and in parts also from Brazil. Also from that part of the world, lower prices were reported by some of the tanners we spoke to, by about $0.10 per square-foot. Only the US suppliers claim to be still one of the few who can obtain steady or even higher prices and the number of people in the trade scratching their heads and wondering if what is reported is the full truth is increasing, especially in view of the fact that some tanners talked of US suppliers almost begging for bids for wet blue material. Looking at the export sales numbers of the past weeks one is also left wondering where all the optimism is coming from.
Reports from Asia – the main market for US hides – have been better than those from Europe in past weeks; some tanners in China are still following their suppliers in need of standard merchandise they can handle. However, if the trend in other markets continues to go south and the US dollar does not lose a larger portion of its value in the coming weeks it is only a question of time before US hides also lose some of their attraction at least at the price levels of today.
With the increasing kill in Europe and decent stocks of unsold material in Brazil and eastern Europe, the threat of a supply shortage is losing a bit of force in the bovine sector. In this regard we found it also interesting that a number of people in Bologna mentioned more interest in goat and sheep, at least for women’s shoes and also in some areas of accessories and handbags. With the attractive prices of many skins at the moment it would not come as a surprise, with the gap between ovine and bovine still being pretty wide.
The split market continues to be driven by the demand for lime splits for gelatine and collagen production. Prices for by-products and suitable splits are reaching record levels and support the prices for wet blue splits wherever this is not done already by the demand for lower price leather materials. With the food season now being in full swing for the winter and many natural sheep casings rejected in the EU due to missing traceability it is pretty likely, that prices for lime splits will remain well supported for the coming weeks.
The skin market has settled pretty well. A number of buyers are now gambling on a sharp rise in supply as a result of the Muslim festival of Eid al-Adha on October 26 and the start of the seasonal kills in the southern hemisphere. It is believed that supply will then be enough again to let prices slide. Female garment fashion is showing more nappa leathers and in the shoe and bag leather segment more goat and lamb leathers are being considered. The coming weeks will possibly not change much, but after Eid al-Adha we will know better if supply or demand is likely to dominate.
For the coming weeks we are now interested to see what is going to happen when the price gap for EU hides and US hides widens further. If prices in Europe correct further they will become increasingly attractive for Asian buyers, at least for those who claim to struggle to find enough raw material. At least for the moment it doesn’t seem that the leather business is strong enough to continue to support all global hide markets, independently of the strategies of packers in some markets. If some suppliers prefer to move product instead of keeping it, a new balance could be established and this would not be at the same price levels as we have been seeing for a while. A price reduction for raw material would be healthier for the industry and could also ease some cash problems. There is no reason and not yet enough unsold hides accumulated to expect any sharp and extended correction, but a moderate correction into November should not surprise anyone, especially considering that prices in Europe and in some other parts of the world have already started to move downwards.
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