Market Intelligence - 05.03.13
05/03/2013
For the past two weeks most of the financial markets’ attention has been on the elections in Italy. Normally one would not expect that an election in one of the EU member states could really rattle and shake the markets, but this time it was different.
We must remember that not too long ago the global financial markets were pretty sure that the European debt crisis had seen the worst and that things would now get better. No warning voices were heard, the euro was gaining value, and the markets were willing to take a risk again. Commodities were rising and investors made people believe that the situation would quickly return to normal.
It was hard to understand how the financial markets came to these conclusions. Nothing was actually resolved and countries such as Spain, Portugal and Greece were showing no sign of improvement. Cyprus, although small, has had to discuss rescue plans and France is showing a frightening economical weakness. Italy was waiting for the elections and the writing was already on the wall. Interim prime minister, Mario Monti, although not massively popular, had actually brought the country back on track and investors’ confidence had been slowly returning since he took office in November 2011.
The results of the election changed almost everything. The outcome (with no party immediately able to form a government) makes it likely that the country is going to be paralysed for a while and it seems that the nation will have to go back and vote again soon. Investors reacted with shock. Suddenly from one day to the next they realised that Europe has not progressed much in the past year. The euro fell, stock markets plummeted, commodity prices were shaken and the fear was back in minutes.
What has happened is another example of why the public has such limited confidence in the financial markets these days. The normal guy in the street still has the impression that everything is just a gamble and the big money is not at all interested in the problems of normal people. Although there is no real relation between one and the other, many people in Europe are becoming more and more annoyed about the social situation and are putting more and more distance between themselves and the politicians and the financial community.
The situation in good old Europe is becoming more and more problematic and serious and it is very difficult to say what the final impact is going to be on the global economy. It is definitely true that the function, position and influence of Europe is fading so it could well be that the general importance of all these developments could be limited. However, everything is connected and for the short-term Europe still has a serious influence on the global financial situation and political stability.
At the end of last week the euro fell closer to the levels of $1.30 than the $1.40 some pundits were expecting just a few weeks ago. Oil and gold fell too. A lot of the enthusiasm has disappeared and some pressure has come out of the asset bubbles.
Market intelligence
In the past two weeks we have seen quite a few incidents that might have some medium- or long-term influence on the market. In Europe it was the horse meat scandal that was making the headlines; the media have made a small story into a big one. In a lot of convenience food and ground beef, traces of horse meat have been found mixed into regular beef. No question about it. Until today it is still not totally clear where the horse meat came from, how much it was and how it passed all the controls that are implemented in the EU for food to reach the plates of the consumer.
This is fraud and needs to be prosecuted. However, that’s it and nothing more. When some ground beef producers inject water into their products it is fraud too, it is prosecuted and considered a criminal act. However, this is hardly going to be mentioned on the front pages. Horse meat, under the condition it had been slaughtered in official slaughterhouses and under veterinary control, may be a mental problem for some, but it’s not a health problem for the public. It is scaring people, showing again that there are no miracles when it comes to the price for food. It’s only normal for the public to react by screaming out and to ask for more and better controls in response to the scare-mongering.
However, more controls mean more bureaucracy, more cost and more complications with a pretty limited potential for success. Criminal activity will always be found where money can be made. Fundamentally it remains a fact that food quality may be different from decades ago, but that food safety today is at the highest standard we have ever had. We know that this opinion might not be too popular among many, but we believe also that it has to be said once in awhile.
In the meantime officials are still trying to trace where the horse meat actually came from. So far we have not heard about any clear results of the investigations. Many are convinced that the horses were slaughtered predominantly in Romania and Poland and then the meat started to enter the production chain to finish up in convenience and fast food.
Retailers were busy investigating which of the products on the shelves might contain traces of horse meat. When horse meat was found, whole lots had to be taken off the shelves and in most cases good food was destroyed. A few considered testing the products for safety and then handing them out to the poor or to sell it labelled at discount prices to the public, but this has been ruled out and it seems that it’s better to destroy valuable food rather than to deliver it to people in need who would be happy to consume it.
In several EU countries beef sales have dropped. On one side, retailers have had to build new supply chains to guarantee clean beef products, and on the other a great deal of consumers became so scared that they were not willing to buy beef-related products until total clarity is achieved. In some other countries people shifted beef consumption from convenience and fast food to regular cuts, which is good news.
Overall the kill was down, adding to the supply problem of hides that we have been facing already since the beginning of the year in Europe. This was quickly making suppliers believe that they continue to be in the driver’s seat, allowing them to dictate raw material prices further down the line. However, looking realistically at the situation of the past weeks the volumes of sales is dwindling. We see payments coming late, letters of credit not being opened as quickly as they should be and, in Europe, credit insurance no longer being sufficient to maintain regular supplies to tanneries. Indeed, with negative margins, many tanners are buying hand to mouth and are just trying to get by. Sellers believe that they can hold the market at the levels we have reached because they continue to find tanners every week who are, in the end, buying at or close to asking prices. However, volumes are clearly down and only the reduced slaughter is making the beef industry believe that it is able to hold the market steady.
Speaking to tanners, most admit that they are spending most days trying to find solutions. Some are trying to increase leather prices, some are trying to find more economic raw material supplies and some are just cutting production to limit their losses. Here it doesn’t help very much if you can still find leather producers in the automotive sector or in the luxury segment who are calling their business reasonably steady and who have very little option other than to bite the bullet and pay. The volume of this business is too small to justify a price level for the whole. However a number of very well informed people are stating that even the luxury brands will not consider accepting ever-rising prices. A lot of the very important brands have absolutely dug their heels in and have made it clear that they are not willing to accept any further price increases and that they have solutions in their drawers to reduce leather consumption or to escape to lower-quality articles.
The repeated argument of lower kills does not really count any more in our opinion. The real question is not how many hides are produced. If one looks at the sales since mid-January it is hard to believe in any of the so-called ‘large sold-forward positions’ many pretend still to have. The fact is that many Asian tanners were said to be short sold, but we tend to believe that their inventories and contract positions are much better than many people think.
In Europe the situation might be a bit different and we have mentioned a number of times that the lead-time of supply between a European tannery being supplied by European suppliers and an Asian tannery supplied by overseas shippers is totally different. You find hardly any tanners these days who say that their orders for the first quarter of the calendar year have been as good as they are usually at this time of the year. The hand-to-mouth policy is not just appearing in the tanning industry, but is also apparent in finished-product manufacturing. The pipeline today runs much more slowly than it did a couple of months ago.
There is no reason today to predict a serious decline or even a collapse of the market. However, raw material prices need to be readjusted to fit into calculations and into the financial resources of the pipeline. This means an adjustment of 5%-10% is, in our view, inevitable to prevent serious impacts on the business for next season. Tanners and manufacturers are exhausted and even the driving force and strength on the Chinese domestic business is fading. Most Chinese we speak to are saying that the leather business after the Chinese New Year holiday has failed to pick up. Consequently general business conditions have slowly deteriorated and the only options appear to be an improvement in leather prices or a correction in raw material prices. The pipeline is close to a junction again.
The split market remains pretty firm. Splits are the cheaper alternative and have entered many collections over the past seasons, keeping demand steady. In Europe collagen exports to Eastern European countries are being hindered by more and more protectionism and import restrictions. However, this segment remains a strong performer.
The skins market is also showing more resistance. Prices have gone very high for light double-face skins. There are still plenty of crust double-face skins around in China, Turkey and Russia. With the high raw material prices we have reached in the meantime their value is safeguarded at the moment and tanners are not interested in any serious price drop before stocks are cleaned up. With the seasonal lamb slaughter now being on the horizon in Europe, there is a worry about absorbing all these skins into the market. Nappa skins are trading at pretty steady levels. Price variations were mainly seen for currency reasons. The better market for wool is also helping and should support skins for fellmongering purposes.
The coming weeks should be reasonably quiet. People start to prepare for their trips to Asia to finish them at APLF in Hong Kong (March 25-27). Many will take a short break for Easter and then head to Lineapelle during Easter Week (April 3-5). Although the fairs will not offer too much leather business, they will offer an impression about the general mood of the leather pipeline. Fundamentally, not much will change. Sellers will continue to use the supply card to hold prices steady or higher and we have to get a final impression of how buyers are going to plan for the summer and how they are going to deal with present price levels.
High-quality heavy bulls and calf skins still find homes despite the record price levels we have reached. For the rest of the market, buyers have still insufficient courage to play hard, but resistance is now growing and exit strategies are being discussed. In two weeks the first travellers will depart for Asia and it will be interesting to see how they are welcomed. We have the odd feeling that a number of sellers will try to clean their books prior to APLF and try to build positions to keep official prices high. How successful they are will most likely be a big secret, no matter what they say in public.
We think that the general market is showing some fatigue but don’t believe this will have any short-term serious impact on prices. In six weeks from now, however, we will have a better picture of the leather business and the prices the pipeline is willing and able to pay.
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