Market Intelligence - 28.05.13
28/05/2013
Not much is happening these days. The ‘cheap money’ policy is still firing the stock markets and most of the major indices are pretty close to record levels. Precious metals have lost quite a bit of their shine and prices for gold and silver are well below the record levels they were at before.
In Europe the debt crisis seems to be fading in view of the investors’ risk decisions and countries like Spain and Italy being able to place new bonds pretty easily, and interest rates that are not falling, but being on the one hand attractive to the investor and on the other the cause of no tremendous burden to national budgets.
As far as the recovery is concerned, Europe as a whole is making very little progress and politicians these days are busy trying to discuss tax issues and to close any loopholes for tax evasion or tax reduction. In the meantime it’s not just that illegal tax evasion is prosecuted, but companies have to justify themselves to the public by using legal tax structures to reduce tax payments. This is starting to become a little bit weird, because what is legal and permitted should not be in any dispute. However, some countries these days are trying to generate as much income as possible instead of reducing bureaucracy and tax regulations to make complicated tax structures for companies less attractive.
An increasing number of investors expect the global economy to be on a moderate, but generally positive track again. Consumer confidence in particular in the US is slowly, but surely rising, property markets are recovering where they need to and the strong performers such as South America, Russia, Turkey, most parts of Asia as well as parts of Africa are growing enough to compensate for the complicated situation in Europe. However, there is also negative news in the headlines, with China reporting a slower than expected expansion of industrial activity. This has sent stock markets in Asia, as well as commodity prices, down.
What remains a bit worrying is the general situation in geo-politics. What North Korea really intends to do remains pretty unclear and the only good thing is that China is not very pleased with the present public activities of its neighbour and may start to exert more control. The situation in the Middle East, in particular in Syria, is getting no better and it seems that more and more political tribes are being dragged into the conflict. No matter what happens, it will take a long time to re-establish stability in the area, with nobody knowing yet how long the conflict is going to last.
Although nobody is paying any serious attention, local instabilities and conflicts can have far more impact on the global economy than we expect today. The currency market has remained pretty quiet with the dollar generally trading still around the EUR 1.30 level and a pretty weak yen.
Market intelligence
The fundamentals of the raw materials markets have not changed much over the past two weeks. Most tanners around the globe have realised that price-rises have come to an end, and fears of restricted and limited raw material supply are fading, except for the top-end segments.
However, it is complicated now for all players to handle the situation. The general consensus is that the vast majority would love to see a moderate and gentle slide in prices into the summer. Many sellers have already surrendered and are trying now to organise a controlled retreat of prices. This poses no danger to any of the still-expensive contracts closed around the peak of the market at the end of April. However, for any kind of market you need always two parties, the buyer and the seller.
Although it is true, that tanners and buyers around the globe are not interested in seeing an immediate and sharp correction in prices because that would restart the discussion about leather contracts and leather prices for the tanners’ customers, it is also true that many are now being very careful about purchasing decisions. It is the old story, that tanners are not good buyers while the market is falling. Consequently the amount of business at the moment is, from our point of view, not enough to sustain the hopes for a ‘week by week, little by little’ situation.
Although many tanners would love to see the market just moderately slide, not enough of them are willing to play their part in the game and are simply not buying enough to prevent unsold inventories from building up slowly but surely. It would require a larger round of purchasing in the near future to clean these inventories up. So, a lot of market policy and tactics are being missed in the published reports circulating in the trade. Many of these are either fed by specific information or they are part of the entire concept, so they try to report a better market situation than the real one. However, we have to admit, that this might be a better way to handle the market rather than to depress it.
At the end of the day one can easily see that the prices reported and mentioned publicly are sometimes far from the real prices concluded between buyer and seller. So nobody can really complain about what is going on; the prices look better than what they really are and this is actually to the benefit of most of the tanning industry. They need desperately to widen their margins again and since leather buyers have not been willing to adjust leather prices to match the record levels of raw material price levels they cannot really be expected to adjust leather prices downward again after such a long and difficult period for the tanning industry, which may not even be over yet.
It’s difficult if the reports are actually used as the basis for price negotiations, in particular between parties that are not big players in the market or in the position to monitor market trends every day. For them they should be at least an acceptable reference, so the gap between the market realities and the reports must be closed eventually so that they become a reliable reference again for the trade in general. This usually happens anyway when the fundamentals are back in place and the various raw materials have found the right valuations again.
All the above applies to the markets in general for standard leather products. We have still to exclude the luxury end and the premium automotive segment. In a recent market analysis conducted by the consulting company Bain, the luxury market is still considered to be growing. This isn’t universal. The demand for expensive watches for example is expected to fall, but demand for luxury leathergoods is still expected to grow by an average of 7% globally. And while growth in China is expected to slow, in Latin America it is expected to grow above the average and to reach double-digit numbers. So, although not everything is made from leather, we can still expect that at least the predicted volumes for 2013 will be reached. And since we are talking already about 2014, the demand for raw material over the coming months can be expected to be steady, if not growing. This is what we also see in the raw material markets now. High-quality hides and skins as well as calfskins are hardly showing any signs of falling prices and demand remains steady and high.
In the automotive sector we see pretty much the same and premium manufacturers are still not showing any indication that they are going to substitute leather in their premium cars. For this market, too, the supply side comes into play. The production of heavy and high-quality hides suitable for the leather desired is actually declining. The cattle for this kind of material are produced predominantly in Europe, but consumption of premium beef cuts is falling, partly as a result of the European debt crisis.
With other premium leather segments (vegetable-tanned leather, high-substance shoe leathers and so on) competing for the same type of hide, the supply and demand equation is different and favours the supply side a lot. An important factor is that this raw material cannot easily be substituted and tanners who cannot afford the material at the moment, because their finished leather prices will not allow it, will have to reconsider their production range and leave the premium raw material to others who can pay for it. This trend will of course also let this segment re-establish a balance again, eventually. A nice reflection of this trend can be seen for extra heavy US steers, which are holding their prices much better than the rest of the market, and in some cases even going up against the generally weaker trend. Also some lower-quality European hides, which normally benefit very little form the situation in the premium markets, are obtaining price levels that can hardly be justified by their grain quality and standard uses.
The split market is a bit out of the focus at the moment. However, the demand from both segments, leather and collagen, is absolutely steady and we would even think that the with the rising demand in consumer markets (particularly Asia) for collagen and gelatine products and the expanding production capacity to meet the demand, the demand for suitable splits will remain high, although some of the competing raw materials have shown serious signs of weakness recently. Splits in the leather industry should be also well supported; many collections for the coming season are showing splits. This is certainly the result of the price hype for grains in the first quarter.
The skin market is seeing two levels. One is the dense and fine-wool department, which is experiencing a strong performance with prices recovering well after a short drop, with lining and double-face demand seeing a strong performance. The opposite is true for medium and lower-grade nappa leathers, in particular for garment. We were hoping that high price levels for bovine hides could actually open the door for some leathers (for handbags, for example) to be made from lamb or sheep; we have to be disappointed at this stage and do not see much of this. The rising demand and prices for nappa lambs and sheep seen in the first quarter came to a quick halt and we saw raw material prices quickly and sharply retreating over the past months. The big importers and wholesalers in Hebei province continue to complain about excessive stocks, poor returns for wool and low local demand for skins, which does not really offer much hope for the long and hot summer.
The outlook for the coming weeks is neither getting any easier or more optimistic. Buyers have started to smell blood and feel, that there is a fair chance for more price correction. It might be rational to hold the market with sporadic purchases and to co-operate with regular suppliers in an attempt to let the market slowly slide, but hope of this is fading. Some tanners believe that if they buy and assist, their competitors will be able to stay out and take all the benefit by re-entering the market when prices are lower. The poor margin situation of the last months has left tanners hoping for some compensation from the raw material market. The situation bears quite a bit of risk. If it were just a beef producers and tanners issue it might be easier, but we still believe that there are more hides in the hands of traders and importers, and their attitudes could become decisive. If they have to liquidate positions quickly to generate cash, the market could move faster. If letters of credit or payment of outstanding contracts are delayed, it would have a negative effect too. As we are at the beginning of the summer and in the low season for leather production, all will depend on the needs of Asian tanners for raw material for the new season starting in September.
Many reports speak about low inventories in the tanneries. Well, our sources have a different opinion and see the majority of tanners in China well stocked, warehouses of importers full and only a handful of tanneries really holding low stocks with a certain need to replenish in the coming weeks. They will definitely choose whichever is the better option between the shipper overseas and the local importer. Consequently we continue to believe that this market has still a 5%-10 % downward potential to get back into line with commercial reality.
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