Market intelligence - 23.07.13
23/07/2013
We have finally entered the peak holiday season and most politicians and members of the financial community have departed for their summer holidays. The remaining few are expected to go next week. This makes activity on the financial markets pretty slow and most of the headlines have been related to espionage [the Edward Snowden case].
If there is anything interesting, it is the speculation that money is returning into some commodities although if one looks at the sharp rise of oil prices over the past weeks, which is related to the futures market, it is clear that it is pure speculation. Observers are basing their decisions not so much on the economic situation but rather on the problems in the Middle East and, as cynical as it may be, betting on possible supply interruptions.
The stock markets remain reasonably steady, but are also not indicating any kind of concern about the slowdown of the global economy. Investors remain pretty optimistic about corporate results for 2013 and do not seem to be worried about declines in profits.
The currency market is pretty quiet too and despite no improvement in the situation within the eurozone the euro is gaining a little bit of traction and the US dollar trades continuously well above the EUR 1.30 level.
In China more and more people are talking about an economic slowdown as well as other challenges – Beijing is also having to deal with environmental issues, social stability, corruption and a new industrial strategy not just based on low labour costs.
In Japan a new government has been elected and is dealing with the strong and extended majority. The financial community is now wondering how the ‘Abenomics‘ are going to deal with the economic and structural problems of Japanese society. [Abenomics are measures introduced by Japanese prime minister Shinzo Abe after his December 2012 re-election with the aim to rejuvenate the economy with a massive fiscal stimulus, more aggressive monetary easing from the Bank of Japan, and structural reforms to boost Japan's competitiveness. However, the measures have resulted in a weakening of the yen.]
Market intelligence
The leather pipeline is entering one of the lowest periods of the year. The European tanning industry is stopping production this week for almost a month and only some of the contract tanners continue to produce during August. Some of the automotive tanners keep the beamhouses open at least on a lower production level so as not to miss any of the few good and heavy hides which become available during the summer. This is also related to the strong order book almost everyone in this field is still holding.
For the rest of the world the leather pipeline is indicating that we are approaching the junction we have been talking about for some time. We are receiving mixed information, particularly from China. The shoe industry, which had been a strong performer for a long time, seems to have run into trouble. Numerous sources are reporting that the order books are shrinking and the outlook for the coming season is far worse than a year ago.
If one is looking at designs and materials, the fear that leather could fade because of the price problem seems justified. Summer shoes this year are sandals for ladies, but for men and unisex there has been increasing amounts of microfibre. This has been produced a while ago and if the consumption of leather declines further, we will know what to expect next season.
To our surprise, however, China is reporting better demand for upholstery leather. We are not quite sure if this is including automotive leather or if it’s only furniture upholstery. We cannot really see that genuine leather furniture is selling well in China. Possibly with the rebound of the US property market, the tanners that had been almost idle in the second quarter have obtained a few more export orders for the rest of the year. We will keep an eye on it. Automotive, however, will be pretty strong in China for the months to come.
This brings us back to shoe leather, which is still accounting for the majority of leather production. If this field is really declining and the information is true that the pipeline is pretty well filled and cash is a problem from retail back to producer, we must get ready for some bumpy roads ahead.
We wouldn’t be surprised if the information about the shoe sector is correct. Looking at the demand for raw material, all the expensive material is having a pretty rough time while most of the purchasing is shifting towards cheaper alternatives. The demand from the shoe tanners has shifted towards heifers and dairy cows and the more expensive ox and dairy steers are continuously losing ground.
Suppliers continue to try to make people believe their sales are much better than anyone can prove, and so we are struggling to understand how much demand is really out there, how profitable leather production is and what the tanners and manufacturers are deciding as far as the volume of orders and materials are concerned. We continue to believe the situation of leather as a material is going to become more problematic in the second half of this year. Whether there is going to be a sharp rebound in the demand for furniture upholstery and whether the positive outlook for automotive leather in all quality levels can compensate will be the interesting topic for after mid-August.
The market has been struggling in the past few weeks and the full picture remains as obscure as it has been for a while. We were able to obtain information about the production plans in the automotive industry and almost all brands are running strong. This includes of course many models which are not leather equipped, but considering the rising number of smaller cars being better equipped the total amount of leather needed will certainly not decline. What the production plans for the final quarter are going to be and if all the cars leaving the factories in the coming months will be sold… well, we will have to wait and see. One might note that the production budget of the car industry has not always been a reliable reflection of sales.
For the moment, EU tanners have almost closed their books and Asia is just sniffing around. Prices in the past week were steady to firm for the heavy and high-quality side, which is nothing new. The rest of the market was bidding lower and sellers were scratching their heads as to what to do: take it and stay in the market or leave, hoping for better times by mid-August when normal market activity resumes. Almost every year people expect the market to rebound with the end of the holidays, but it has hardly ever happened. Most in the leather pipeline have their programmes set until the end of September and use the time until then to discuss with their clients new orders and prices before deciding any large volumes of new raw materials.
The split market is in the same doldrums as the hide market. The collagen market is showing a few signs of weakness. This is mainly related to weakness in the supply of alternative raw material. Pork is slowly adjusting in price and although there is no direct relation between the products, a certain interference can always be seen. Wet blue splits or splits for the tanning industry are still steady to firm due to short supply.
There is also not much news from the skin market. The main interest is still for top-quality lightweight double-face material and good, fine wool-lining skins as well as skins suitable for decoration specialties.
The next weeks will likely just be a repetition of the last: Little activity, the majority of which will be in Asia, while Europe will be quiet with production still running for the core items. There will be few changes in price and we would be surprised to see more pressure on suppliers to deal with the much-needed market correction.
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