The first weeks of May are normally when spring begins. With holidays in many countries and the sun out, activity on the financial markets normally declines. Investors have a saying: Sell in May and go away! However, this year, things were different. While holidays were still taken and spring arrived, the financial markets were driven by rounds of stimulation. The European Central Bank (ECB) lowered interest rates by another 0.25 %, which aided the stock markets in Europe, and in Japan a new round of money supply to fight deflation sent the Nikkei index rocketing and the yen falling.

They have followed the only strategy available to them since the crisis began in 2008: inject money and lower interest rates. A side effect is a weakening currency, which supports exports.

The yen crumbled and broke the 100 level against the US dollar and stock markets were reached record levels in several countries. So far, so good – investors enjoyed the assistance by governments and national banks.

As usual, though, it is a two-sided situation. While professional investors on the stock markets were pleased, the ordinary savers were less happy. Their savings accounts and life insurance offer lower returns and in most countries are not even compensating for inflation. Consequently, many are switching to stocks in the hope of receiving at least a bit of yield. This is a pretty risky game considering the levels we have reached. The low interest rate is a yield killer and a confiscation of property for the normal investor looking for a reasonably yielding home for his money. Although politicians don’t like to talk about it, they consider this the price for reducing borrowing costs for their countries.

The intention of the low-interest policy is said to be making access to credits easier, to reduce borrowing costs for companies and consumers and to stimulate demand. This is how it is sold to the public. Many financial publications question this strategy and indeed one can hardly see the cheap money reaching the intended destination or being needed in the amounts offered. Banks offer cheap consumer credits to those employed, but companies find it hard to convince banks to extend finance or to offer loans for new investments.

The currency and commodity markets did not move much. The USD reacted a bit to daily news, but remained in a narrow band of 2.5 cents around the 1.30 level to the USD. Oil and gold bounced a bit, but in the end, investors were not encouraged enough to send prices seriously higher.

Market intelligence

The past two weeks extended the trends we described in our previous issue. The separation between the high-end market and the standard items became more evident and influenced the international markets in different ways. It is not just that high-quality products maintain their values or even extend them, we see medium qualities falling in price and economical raw materials being stable or even rising.

These trends are the long-term consequences of the markets seen over the past season, or six to nine months. Prices for high-quality raw materials rose exponentially due to strong demand from the luxury markets and dragged medium-quality hides with them. Lower quality and more economical hides did not take much benefit from the trend, because demand and margins for the lower end were not good enough to attract producers which were trying to upgrade production and image.

While the prices for high-quality materials were justified by the retail levels of finished products, the prices that had been reached for the medium end quickly disqualified many calculations. Consequently, producers had to look for solutions for the next season under the condition that the customers were not following the leather prices. As quickly as prices went up, the shoe and upholstery manufacturers were looking for solutions and some of them found them in more economical hides from South and Middle America or even Africa. This has created a market environment in which the top end was able to decouple from the price problems, economical hides saw a revival and the average sector started to face problems for the usual reasons: too expensive for the quality or not good enough to qualify the price.

This was reflected in the market in the past two weeks. Prices and demand for top-quality hides used for luxury products and for the premium lines in the automotive industry faced few problems – quite the reverse: most buyers were eager to secure raw material supply instead of discussing price reductions with their suppliers.

For the standard hides like US, Australian or some EU materials, which were facing strong headwinds and suppliers who had done everything they could to push prices higher, what had been indicated some time ago became reality. Prices had to be adjusted to find buyers for the hides. The question is by how much.

Again, it has turned into politics; suppliers claim they had only to make small concessions while buyers claim they had been able to reach significant rebates since the highest levels paid. And for both statements, one can find witnesses. However, in our view the buyers had the upper hand and whoever was willing to negotiate hard and possibly with some teasing such as quick shipment, saving money or an extended volume and shipping time was able to find pretty good deals with significant discounts on what has been called 'market'. Reductions of $5 or more were seen when the final deal was confirmed.

A similar pattern was seen for wet blue hides. To move some of the stocks, suppliers had to offer prices that were attractive enough to prevent customers waiting for further market adjustment, and that meant not only discounts on the cured prices levels, but also for the product as such.

Economical hides were as favoured as much as the premium ones. Many tanneries and shoe producers have shifted part of their procurement to less expensive raw materials and origins, which has supported demand for these products and kept prices stable or in some cases even a fraction higher.

Consequently, the entire price structure has seen major changes and the gap between low and average has narrowed by quite a bit. Many players are now asking if this is enough or if it is just the beginning of a new valuation of raw material prices after the almost endless and sharp rise of prices since 2012.

We continue to believe that this will depend on the inventories along the supply and production chain. We still believe that the situation cannot be generalised. Tanneries may have lower-than-average inventories because they look less at price trends and more at stock, finance and margins. Consequently, many of them were holding limited stocks for a while already. Traders, wholesalers and importers however were happy taking positions, being just interested in market moves to make a profit. Seeing on one side tanners with limited stocks and on the other side the beef industry being more-than-interested in higher prices, it was pretty comfortable for many of them taking the position of becoming wholesaler and financer and becoming pretty inevitable for their tanning customer. This worked as long as the tanners had to buy because of the season and insufficient stocks. Now, with the low season of leather production starting, suddenly tanners need less raw material and the game does not work that easily. This is now the critical factor in the equation. How long will tanners buy less than sellers need or want to sell, and what will their next decision be as far as raw materials are concerned?

The market players are trying to support and entertain the position that suits them best. The beef industry is still trying to convince the tanning industry that supply will remain an issue and tanners will have to return to the market at the latest in June to make sure raw materials arrive in time for the start of the next production season. Buyers, however, point to the higher seasonal kill in the US, enough inventory to stay out for a while and to force the prices back.

Well, it might be, as usual, a bit of both. There is still no indication that leather demand is facing a serious problem. Consumer business on a global scale is enough to keep the leather demand steady. It is rather more a question of prices, margins, finance and the regular flow of material that makes the market pretty sensitive to changes. We are still in price territories that are extremely high and leather prices have not yet adjusted. Tanners have also so far no market corrections to average their raw material prices out.

With the increase in leather prices achieved in the past six months we reckon a market correction of 10% to 15% from the real top prices would be enough to get calculation back into line. If leather demand is stable there is a fair chance that a price slide to this extent is not unrealistic and would allow tanners to return to positive margins. The only danger remains the issues of psychology and finance which – as we all know – can quickly become a market mover.

There was little news from the spilt market. Most users reported a steady-to-firmer market supported by the demand for low-priced leathers and the steady interest from the collagen producers. However, with the recent change in the market trend for hides, many players are now also watching the split market with more interest.

The skins market is not easy to read at the moment. Fairly negative news is reaching us from China. In the Hebei province, where a large proportion of the fellmongering and nappa production is located, people report large stocks of raw skins and a lot of payment issues from the smaller tanneries buying from the large importers. Many speak about ongoing waste problems and slow demand for lamb nappa with more skins arriving.

For the double-face and shoe lining market the situation seems to be better. The cold and long winter in Europe has delayed the arrival of new season lambs, which is supporting the market a bit. However, many suppliers claim the huge wave of interest seen some weeks ago has dried up and particular in Turkey the potential buyers have withdrawn for the time being and now wait for more offers and available skins before discussing prices. It seems that the skins market still needs some time to sort itself out.

For the coming weeks we believe the market will not show much change from what we have reported. The US market shows pretty disappointing sales numbers and that speaks for more price corrections. However, sales are still there and it doesn’t seem that the packers are too worried about the situation. They seem to sort their position out with good and reliable customers and make the necessary prices concessions behind the curtains instead of sharing them with the public. So, it might be wise to have a look at the market for trader hides which is today possibly better reflecting the real market prices than the quotes that are published by many reports or the offer lists sent around by the packers.

Fundamentally we still see some potential for price corrections and maybe three-digit numbers have to fall before tanners will seriously return to the market. This would make US hides pretty attractive and business for European and Australian suppliers far more difficult. Sooner or later this will mean some reaction in these markets. Generally, the market situation is pretty sensitive and little incidents can change the prices quickly.

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