Market intelligence – 20.8.13
20/08/2013
Although right in the middle of the holiday season, the statistics offices remain open and delivered some better news about the economies. With better growth rates in the eurozone, the media were quick to declare the end of the recession. This might be a bit premature, but at least a meagre growth was seen. The good news is that shaken countries like Portugal showed the largest gains. Observers have questioned whether if this is merely a short-term recovery in the second quarter after the long winter or a real sign of an improvement. It is generally agreed, however, that recovery will take time.
There was positive news from the US labour market with jobless claims at the lowest level since 2007. However, the rising cost of living was worrying, a global problem as food and energy prices rise. Extreme weather conditions in many parts of the world – such as the long winter in Europe and the extreme heat in China – pushed food prices higher. Consumer confidence dropped in the US – a worrying trend in an economy which is based on consumption.
The situation in Egypt is fuelling worries about stability in the Middle East where both Syria and now Egypt demonstrate the region is far from stable. This has held oil prices stable or rising over the past weeks.
Most analysts are trying to sell the story that the global economy is through the worst and set for recovery towards the end of the year, but this might just be good news to fill the summer papers. The situation remains pretty vulnerable and is, in our opinion, far from being stable or back on track.
Market intelligence
It is difficult to take a general position on the leather pipeline at the moment as it is too fragmented. Members who have been in the trade for several decades say they have not seen this situation before.
Similar to the past few months, leather used in finished products is being actively consumed the automotive and accessory industries. Where leather is an optional material in price-sensitive consumer products it quickly reaches is price limits, because there is still no premium paid for an ordinary product just because it is made from leather. Many attempts have been made to change this, but it is still the hard reality of the global consumer markets.
The beef industry finds this hard to understand when they had been told – and believed – that the limited supply of hides and skins is meeting a rising global population with more money to spend. That industry believes leather can be sold at a premium in finished products; however, there are just not enough of them.
The consumer market for leather articles has taught us two lessons: the growth of the domestic market in China is not endless and the price for leather has its limit at retail level. The first lesson might be new for some while the second one, we already knew. The main problem was the myth was created with a great deal of support from buyers, in particular from China.
The optimism about the Chinese consumer markets, access to money and quick speculative profits between the purchase of the material and the resale created a price bubble, not much different to any other bubble of asset prices seen in recent history.
The main question is where we are now and how we deal with the situation. Will a slow deflation be sufficient to handle short-term financial issues? Where is the physical balance between supply and demand? And how will producers of raw material deal with the problem?
So far, the US market is in orderly retreat while most of the other origins still fight the battle and play the supply card. US hides had been the most expensive in the bull market of the first four months of the year; they had been overshooting with many tanners not being in the position to switch quickly enough and speculation adding fuel to the fire.
Around the Hong Kong Fair [Asia Pacific Leather Fair in March], US hides had been the ones being substituted, and with most packers defending positions the inventories began to increase, first at origin and later at destination. A number of the larger buyers received expensive hides six to 10 weeks after they bought them and needed a steady market to liquidate the hides without too many losses.
However, the game didn’t work out well. Slow payments from tanners and leather buyers, stocks on wholesale and slowing retail demand in China combined with the rest of the leather pipeline being in or preparing for the slow season. Slowly but surely the product flow began to congest, hitting the US hides first, which need almost three months to begin their retreat in prices. In the meantime other origins were able to take advantage of the situation and kept their books and warehouses as clean as possible.
With the decline in the US, prices have become attractive versus other options, but not yet attractive enough to seriously stimulate demand to the extent that inventories are cleaned up and the market has returned to balance. In the meantime, hides from other origins are beginning to pile up and the suppliers are seeing the writing on the wall.
Hopes are now focused on the seasonal recovery of demand starting from September. That will come, but the question is whether it will be enough to rescue the market or whether it will just be used to consume what is still in stock in the tanneries. Even more important is the question of whether there is enough money around to finance it.
Many are talking about the ‘need to buy’; they forget how many tanneries in Asia have been struggling to open their L/Cs in time to meet their financial obligations. This is certainly not because their warehouse is empty and their bank account is full; it is possibly the opposite.
There are tanneries that have managed their warehouses and cash boxes well, that have a stable order book and may just suffer from the overvalued raw material prices of the first half of 2013. However, they are ready to sit tight, because they feel that there might be the chance to balance a good deal of the losses from the first semester by lower raw material prices and a widening margin.
It would be good to know when the ones with frozen cash and the ones with decent order books are ready to re-enter the market. It is also important to know what the leather demand is going to be in the winter season. What have the brands and retailers decided for the coming season as far as leather types and leather consumption is concerned? Less leather and cheaper leather, or will they continue to negotiate hard on prices and let things develop?
From our position it is still too early to judge. One thing is clear - that the last six months could not meet expectations and inventories have been building. Although many try to believe that the global economy is going to recover, it might not be in time to promote more leather consumption. In addition, it doesn’t seem that hides and skins are an investment for hot money at the moment. We tend to believe that it will go lower before it will go higher and the next two to three months might see more adjustment. In Europe the kill will go up while in the US the kill has seen its peaks, but there is enough inventory to be cleaned up first.
The split market is still high in price and low in supply. We fail to see any short -term changes with the present supply due to reduced tanning. With the increasing influence of the collagen market we believe that the market for splits might be more protected than for the hides themselves.
The skin market is unchanged. High-quality skins for top quality nappa, double face and linings are still in good demand and can defend their market prices as well as the premium bovine types can. Standard nappa skins and lower qualities struggle and prices are at the lower end of the range. Headwinds in the wool market for the same reasons as the leather market make calculations difficult.
For the coming weeks, the market will enter into ‘wait and see’ mode. There are still some who believe that the market will turn around, business will be active, sales sufficient and everything will be better. However, the facts are against them and even a week or two with more hides sold doesn’t change the fundamental problem that the demand for leather cannot absorb the amount of raw material produced. Leather production never stops and product always flows, but we think it will take a while into the autumn before the issues will be sorted out. In general we think that this market still has a 5% to 10% downward potential.
Share this story:
