Market Intelligence - 19.02.13
19/02/2013
The last two weeks were determined by discussions on how nations can increase tax revenues. In public this is called ‘fair’ taxation. In the West it is basically a discussion on how wealthy individuals and global companies can be stopped from using legal or illegal ways to avoid paying (high) taxes. Offshore accounts, shifting profits legally to the place with the lowest tax, using all ways to avoid high taxation in home countries has become one of the main subjects of discussion in many countries, predominantly in those where taxation is well above average.
Taxation is an issue of constant debate. Hardly anyone likes to pay taxes, mainly for the reason that those who pay the taxes are not happy with how governments spend the money. There is never enough money for governments and how weak they are in managing tax revenues has been demonstrated by the debt crisis in Europe. The Lehman crisis was special and has cost a lot of money, however the fundamental problems are much older. Structural issues, deficit spending and so on had ruined many budgets before.
The wrongdoing of banks and financial investors cannot be disputed and it is unacceptable to privatise profits and socialise losses, but it is also wrong to use this as an endless excuse for looking for higher taxes. The situation now in the western World is that many governments are no longer looking for what it right, but for what is popular. As long as taxation remains a national issue and is used by politicians for their own local political capital, it will be a problem. It is still a clash of cultures. While many continental European societies see the state as the major institution and the majority of people believe in a strong central administration, even at the price of a reduction in liberty, others still favour individual freedom and responsibility more highly.
In the meantime the European economy fallen back into recession. The EU economy shrank by 0.6% in the last quarter of 2012. Unemployment remains high and the outlook is not particularly brilliant. Most analysts remain pretty pessimistic about the situation and about developments for 2013 too. Consequently concerns have risen again about the crisis being already over, reflected in the abrupt halt in the recovery of the euro. The exchange rate against the dollar fell back from the top levels of $1.37 to $1.34.
Many are also discussing the risk of a currency war and a spiral in valuations to support individual economies in their efforts to export products. In particular, the weak yen has triggered discussions about the possibility of other countries starting to use their currency values to support industrial production and competitiveness on international markets. Also some European countries are expressing concern about the value of the euro and think a devaluation could be a solution to support their economies.
Oil prices remain pretty high with general optimism about the global economy and a recovery later in 2013.
Market intelligence
The past two weeks have not been too active. The holidays in Asia have taken out of the market a lot of buyers who were well enough covered to be able to leave their mobile phones switched off and not have to chase suppliers for offers. Prices had run far too high and there were few bargains around.
Suppliers expected the break and, with their general optimism, they don’t see any reason to try to tempt customers with special offers. Raw material inventories are not yet pressing them enough to make them consider stimulating demand by lowering prices. Although US statistics have shown no particular strong demand or sales levels over the past three weeks, suppliers are still claiming to be well positioned and are maintaining a strong position to hold prices high and not make any serious concession.
This is the public story, but we have been noticing a few sales with discounts. In spite of the peak levels seen in the official price lists, a number of sales have been made at prices that are 2% to 4% below what people are claiming to be the current market level. Most suppliers are claiming that these are just isolated and small volumes and should not be misunderstood as being a trend. And certainly the supplier’s position still seems to be confident enough not to surrender or to think of any serious price reductions in the near future. In the logic of history in most years prices have hardly ever come back before the APLF exhibition in Hong Kong at the end of March and we cannot see anyone really being ready for discounting prices until then.
The key questions remain the same. Leather prices are no longer sufficient. Many leather sellers selling to the big names around the globe have implemented clauses in their contracts that allow them to raise leather prices automatically when raw material prices climb by any number above 10%. Although this might save a few from the effects of the temporary situation it can’t be the solution in the longer run. Leather users can and will not accept an ongoing rise in leather prices that affects their own calculations and makes their budgets obsolete. Either you believe in the theory of the survival of the fittest and you pay, or you think about defence strategies that mean either to substitute or to use less leather. Generally such effects can only come into play in the second quarter of this year when new leather contracts have to be discussed and negotiated and also the next production season has to be prepared. So one can still count on being safe in the short term, but for the medium and long-term it is necessary to obtain enough reliable information about how the leather buyers will react to the present situation and raw material prices.
The often repeated story about shrinking raw material supply has come in for questioning with the recent publication of information from the US Department of Agriculture about global beef production and consumption. While indeed there are predictions for shrinking slaughter in the US, in other regions like Brazil for example beef production is expected to rise. For leather production this means that possibly some preferred origins will offer less material, but others will be able to compensate. However with the imbalance of demand this might not help everyone. Higher quality raw materials are definitely shrinking in supply or at best remaining steady. Medium- and lower-quality raw materials will at least be available in the same numbers as before.
This is reopening the discussion about whether the leather market might, more than ever before, be divided into two segments. As long as the luxury markets and the automotive industry continue to perform strongly on the back of rising wealth, premium leather qualities should still have a pretty positive outlook. Elsewhere, leather will have to deal with competition from substitute materials. Having said that, one has to watch the long-term product and material strategies of luxury companies. Although it is pretty hard to imagine that they might reduce their consumption of leather as a distinguishable, high quality, natural material one can never rule out the option that luxury brands might discuss internally how they can protect themselves against inflated leather prices and keep material prices under control. This is not going to be a short-term issue, but one that will have to be monitored season by season.
In Europe the public and the media are dealing with a new scandal. A lot of convenience foods using beef have been found with horsemeat mixed in. This is not actually a serious health problem, but certainly fraud. Horsemeat is significantly cheaper than beef and might be used to lower average prices or to increase the profit margins of beef traders. Whatever one thinks about horsemeat in general, this does little to improve the confidence of the consumer in the supermarket or that food control along the supply chain is safe. A lot has been discovered, but it is still totally unclear as to what extent contamination has occurred. Has it just been residuals in machines or warehouses or has it actually been a full criminal activity by mixing intentionally smaller or larger quantities of horsemeat into ground meat for convenience foods?
Whatever the final result, it will not be good for beef consumption in the short term. So far it hasn’t hit slaughter and beef consumption, but one can never know what further news will be discovered and how this is going to influence the consumer. One way or another, one has the impression that every kind of protein has the potential to be subject to scandal and the consumer is constantly being scared and confronted with new stories. The official reaction is also constantly the same: more control, more regulation, more anti-meat campaigns, all with very little effect. This does not excuse anything, but not matter how much you increase control and regulation you will never achieve 100% safety and sometimes it seems it would be better for consumers to take responsibility and select the best and most reliable options for themselves. In Europe we have a pretty good example of how much bureaucracy and regulation cost and how much they have improved safety for the consumer. Increasing the cost and effort by 10 fold might only offer you a two-fold improvement. Anyway, the story will affect the European market for quite some time and it will certainly not increase beef consumption in the short term.
If there was any mentionable market activity in the past two weeks, it was in Europe. What we indicated already in our last issue became more evident over the past two weeks. The short-term supply management of the automotive tanning industry is causing repeated problems when slaughter falls back. In the first quarter European automotive tanners are usually pretty busy. The roll-out of new models and the persistent demand for luxury cars have created a pretty high level of demand for premium leather supply. Insufficient inventories and low slaughter have opened the battle again for high-quality males to be supplied to the drums. However, if animals are not killed, the hide cannot be produced and delivered, no matter what price is paid. Packers in such an environment do what every supplier would do. For the limited material available you ask more money and so abattoir prices on the continent have jumped again by up to 10% for bulls for the month of February. At the same time tanners are complaining again that suppliers are trying to compensate for missing volumes by mixing raw material into their deliveries and thereby not meeting the material contracted.
In the light of this, suddenly a number of tanners have been sending emails and faxes around to their suppliers telling them that the new EU 16055 norm for raw hides has been created and asking all suppliers to sign acceptance and compliance of the standard. This didn’t come really as a surprise as many in the trade were expecting some kind of an effort to standardise raw material descriptions and qualities. Industrial tanning productions in Europe have been complaining for a long time that they feel that they have no guarantee that what they have contracted will be delivered. This is actually a very wide and complicated field and applies to trim, shape, take-off and correct weights of the material. The news sent some initial shockwaves through the trade as it hit the suppliers without any prior notice and only a very few were able to handle and understand what this was all about.
However, as the week progressed the more relaxed suppliers became about the issue. Tanners might propose and insist, but establishing new norms unilaterally without discussion is not easy, even less so when you are so desperate for raw material that is in limited supply. It became quickly evident that such a norm can hardly be implemented without general agreement, even less so if you have no serious supply alternatives if you step out of the raw material supply chain. Suppliers rejected the new norm and tanners had very little option but to accept this for the time being and just hope that this will trigger negotiations about how quality and weights can be more regular in the future.
From our point of view we have to admit, that we find the whole discussion pretty awkward. As a matter of fact raw material descriptions, specifications and the control of the same are pretty clearly regulated by national and international contracts already. In Europe all that is missing is the standard of weight control for fresh, chilled material. Everything else is already available upon looking into the files. The major problem was that many tanners have suspended raw material warehousing and raw material income controls. Consequently many suppliers have had the option to supply to customers with little or no control. Over the years this has caused all kind of standards to fade because it is pretty difficult to maintain something that is not controlled. Tanners were just rating their suppliers, but in the end also this did not serve much purpose. Firstly, only in a very few cases were the results of supply actually shared with the suppliers and secondly suppliers were treated differently according to their importance and market standing.
For the time being the issue has been moved to the federations and we cannot see how this norm is going to be respected and accepted very soon. It wasn’t a very smart move by the tanning industry to shoot without a bullet in the gun, but we agree that the existing standard, and updated ones, should be respected to the benefit of everyone and for fair play in the marketplace. We can’t see how this can be achieved without a committee representing everyone to find a common agreement.
Tanners in this respect should also recognise that if they want to run a beamhouse and look for raw material supply they should be aware of the fact that such movements play into the hands of those suppliers who are looking to gain more market control by increasing wet blue production. It is they who will have to deal with the problem themselves and if they cheat they will line their own pockets, raw material supply will shrink and more soaking capacity and influence on tanning processes will fade.
The split market remains stable or firm, but with a lack of activity due to the holidays this statement has little value. With hardly any trading activity and most people absent no real statement about this market segment can be made.
For the skin market pretty much the same applies. However, the market in Turkey was one of the few not to be influenced by any of the holidays. At least as far as Europe is concerned many were reporting a lot of unsolicited phone calls and emails asking for offers of lambskins. A bit difficult to understand because the present season in Europe is not actually producing the lightweight lambs the Turkish market is really looking for. However, with very few skins around and prices in the preferred supply origins being extremely high, one could consider this to be the traditional sniffing around to find bargains.
With the return of Asian customers and reasonably steady wool markets, it is going to be as interesting for the skin market as it is for the hide market to see the mood of the Chinese tanners when they return to their desks. At least for European skins it is their time of the year in the first quarter.
We refrain from actually taking any clear position about what we think is going to happen in the coming weeks. The leather industry is still in a strong production phase. Packers and suppliers are still taking a pretty positive view of the market, supply will not increase and this makes it pretty difficult to expect any significant decline in raw material prices. However, it is also true that many large producers in Asia seem to be better covered for the current season than many suppliers like to admit. It is hard to believe that sellers are willing to reduce raw material prices to secure sales and shipments. However, we have the gut feeling that within the next month or so we will actually get a clear picture of how the leather pipeline is going to deal with the price levels we have been facing for quite some time now.
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