German perspective – 20.8.13
20/08/2013
This was not the first time and the consequences were the same. Tanners were pushing suppliers to deliver, sourcing circles were widened and more than the normal raw materials were tested and accepted, not to mention that more selected wet blue and wet white hides came into play too. They triggered more demand in the market from the traders and producers of semi-finished hides. We saw the classic supply cocktails mixed, where cheaper and lower-quality hide origins are bought by traders to be mixed into regular supply, which has lifted prices levels for heavy hides. This practice allows buyers to pay more for the preferred supplies being averaged down by the cheaper, poorer ones. As a consequence this is not doing any good, because it triggers a price spiral without really solving any of the supply problems, but just adding to the quality issues in the tannery.
This is one side of the coin in Europe and when we leave the veal skin market out it might reflect about 25% to 30% of the market. For the remaining 70% to 75% the situation is totally different. The global benchmark origin, the US hide market, has been declining for weeks now. Lower prices have, however, not triggered any increase in demand. This may due to the low season and the holidays, but a greater impact has been the price, the congested market in China and the increasing cash problems along the supply chain.
The problem is not the weaker market as such, but the widening gap between the EU prices and the US prices. EU hides are far too expensive and the weaker USD has amplified the problem by another 3% to 5% in the past two months. So far it seems that the European trade is still too busy with political games and too impressed by the veal and heavy hide market rather than realising the market realities.
Some hope that their trips to Asia will sort all the problems out, but that seems - from our perspective - hardly an option with no signs of recovery of the US market in sight. The forward sales for delivery after the holidays will erode quickly and in the week after the Shanghai Fair the European buyers and sellers will have to meet to find a common price level which will finally have to be closer to the international price levels – and that means lower than today. How much will be determined by the results and prices set in Asia over the coming two to three weeks.
For the moment, stocks are high from raw to finished and slow payments are a massive burden for the market and will need to be sorted out. The wide gap of prices needs to be closed and the abattoir prices have to be brought back to realistic levels and in line with market conditions. This week the EU market remained in holiday mood and the Asian buyers are waiting for all the 'desperate' sellers to meet them. Consequently, the weekly sales were low and can be called 'patchy' at best. The interest was mainly for low grades and a limited number of dairy cows, but at lower levels than before. Revenues for sales to Asia shrank by another 2% to 4%.
Without taking the prices no sales were possible and the only alternative would have been waiting for better times in Shanghai. Although our colleagues seem to be more optimistic than us we haven't heard of anything positive except the continuing hype for high-quality material.
The kill: The kill has fallen back again and is still pretty low. That is good on one hand, because the market is difficult, and bad on the other as it harms production flow and fresh hide supplies. It seems that it will take another two weeks until the kill might slowly resume to more reasonable levels.
What we expect: It doesn’t seem that the players are willing to accept the market facts. Hope still dominates and the shortage of some types commands the total. However, we don't think that this will change much. The dog still wags the tail and not vice versa. We see the market being weaker, but have no idea by how much and where it will find a bottom for the start of the leather season
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