Market Intelligence - 3.09.13
03/09/2013
The global community is slowly returning to work after the summer holiday in the northern hemisphere. Apart from the question of the global economy returning to sustained growth, geopolitical stability is the main issue of concern. Most of the financial world is still trying to avoid any discussion about the possible impact, but it can not be denied that the situation in Syria and Egypt could have a serious influence.
The big players Russia and the USA, but also China are meeting again and at the moment are holding each other in check. The US and the western world are trying to avoid becoming involved in another civil war, but day by day the pressure to protect innocent people is increasing, although nobody really knows how to do it. The use of chemical weapons has crossed a red line and makes intervention more difficult to avoid if the West does not want to lose credibility and influence in the region. A military intervention is, after the experience of Iraq, Afghanistan and Libya, the last option. In any case, global stability is threatened not to mention the casualties and cruelties civilians are suffering. The conflict is deeper and includes old and unresolved conflicts around Israel. The fact that there is also a strong alliance between the Assad regime in Syria, Iran and Hezbollah implies high risk in the case of intervention.
For the markets, any expansion of the conflict could threaten oil supplies and send oil prices significantly higher again. The oil price is already up and this is not the consequence of the physical supply and demand situation. It is all about oil again and any Western intervention would just boost the risk of new terrorist attacks.
The general economic situation and outlook is not clear. Weekly data is still a mixed bag of information and a good number is followed by a less positive one so no clear direction can be traced. The euro crisis is still problematic with Greece still in need of aid, and the political instability in Italy is not helping either. Other countries in Europe show signs of improvement and some believe the worst could be behind us (without answering the question how budget deficits can be wiped out eventually).
Many emerging markets are suffering a serious decline in the value of their currencies and in particular in India the economy is becoming stuck owing to the lack of reform. The great hopes for a new success story in China are fading and faith is also declining in the currencies of Indonesia, Pakistan, Brazil and others.
It seems that we are at a dangerous junction for global stability and we can only hope that the situation calms down; it will have a serious impact for the world and the economy if it does not.
Market Intelligence
This issue of Market Intelligence is going out just before the doors open for the 2013 edition of the All China Leather Exhibition. Many expect news and information about what is to be expected in the coming months and the next leather season. We are not so sure that people will get what they are looking for.
This show is not really a leather-selling event. It is not even a reflection of the Chinese leather industry. And it’s too early after the summer break to deliver facts. It is not a trend-setting fashion event, nor is it a purchasing platform for brands and retailers. So, it will just be what it has always been: a big get-together of the leather industry and its associates and for many Chinese people working in the industry the chance of a shopping trip to Shanghai combined with a few good lunches and dinners. This is good enough, but we should not expect more than that.
The meeting of leather buyers, tanners, chemical companies, machinery suppliers and raw material suppliers, plus associated industries, can offer good insight for those who ask the right people the right questions. This has been, and is, the function of the two mega events in Asia, Hong Kong and Shanghai. The real decisions and business platforms are the function of the smaller and more specialised event like those in Bologna and Paris, or regional events in Latin America, not to mention trends shows for fashion, luxury products or general consumer goods, which play an important role for general and long-term trends.
The meeting in Shanghai is surrounded for many by trips to visit customers in Asia, predominantly in China. Traditionally these visits are made before the fair and many delegates will come already with impressions and information that they have gathered during their meetings with customers or suppliers.
This year discussions may be more than ever about raw material supply, because the demand for many of the large raw material-supplying origins did not perform as expected in the second quarter. This has put many larger producers under pressure to get a clear idea about demand for the rest of the year. Many left for Asia earlier than normal with a tighter schedule trying to get ahead of the competition. For many the key question is: are we just fighting a price problem, because raw material values had been pushed too far too fast and price adjustments will sort out the congestion in the raw material markets, or have we entered a period of declining leather demand? This is actually the one million-dollar question. Why? Well, because nobody wants to consider the second option. The fundamentals seemed to be so clear, many were left with the opinion that we were just at the beginning of a long cycle where the production of raw material would grow more slowly than demand for leather. Logically, then, there might be breaks and pauses, but there is only one way and that is up.
Growing consumer demand and wealth would allow the price for leather to rise, because it is meeting a supply limit. So far, so good, but our regular readers will remember, that we have never been convinced that in the mainstream this logic can actually work. One always has to look deep into the question of speculative inventory, with existing and used production capacity being factors to set prices too. We fail to see the general story around leather to make it such a desired material that it can obtain higher prices in a direct comparison between leather and non-leather material.
To underline our opinion one just has to look at sports shoes in which hardly anyone can tell what material is being used any more and only a true leather aficionado will really search and pay extra for a soccer boot, running shoe or any other athletic footwear with leather uppers. What has worked pretty well for the brands can be easily transferred to other shoes as well, not to mention that younger consumers no longer really draw a line between sports and casual shoes. The brands are not even testing the readiness of the consumer to pay a premium for leather shoes. If they believe, that higher prices could cost them market share or growth potential they just won’t do it, with very few exceptions. If the target price is not met, less leather is consumed until the consumer sees a story around leather or regains the realisation that a good leather shoe is more comfortable and durable than a plastic one. As many consumers never even think about using a shoe long enough to understand the difference, it is a hard job to explain this.
That leaves the sales and price potentials to the more wealthy, and how well that can work out one can see easily in the accessory and premium automotive segment. Not that you would need leather there either, but from a certain price and image level there is no question and no alternative to leather, although the parameters of function and substitutes are not much different.
In the end it is all about the story, the prestige, the durability and the stability of value. This is what makes leather an absolute must as a material for certain products. To justify higher prices for hides and skins and leather, this image and story has to be enlarged into more leather products and while it might be a great chance for labels and brands to set themselves apart from the competition, it does not seem to have made enough of an impression on consumers to have any effect so far.
In the past week some of the corrections we have expected for some time took place. US hides, which are still the benchmark for the global industry, fell week by week. Packers do not tire of reporting good sales, but the facts show a different picture. Nobody really knows where the price stands because it seems that the prices published do not truly reflect the sales done. A great part of the correction we considered to be necessary has already happened without stimulating demand. However, one day the stocks in the tanneries and in traders’ hands will be absorbed and some strategic buying to average the price down will take place. Whether a round of buying can have a long-term effect can only be decided when the the volumes of leather orders and the financial resources of the tanners are known. It’s still too early to evaluate this today.
The top end of the range is still running its course and we have to admit that we are surprised to see how wide the gap between the prices has been stretched. Top-quality European bull hides are still rising in price no matter what the other markets are doing, and the prices obtained are stunning. The same applies to top-quality calf skins, and this just confirms our comments above.
The split market continues to be firm. However, what has sent the prices up could send them down eventually too. If prices for hides fall further, the time will come when splits are no longer a cheap alternative, and collagen alone cannot support the entire split market. It would also require a change in materials used in collections, so the final reaction in the market might take a little while, but without a major rebound in hide prices, it is only a question of time.
The skins market shows similar signs to the bovine market. Top-quality, light skins are expensive. Regular and low-end skins still face headwinds and prices are barely steady. The next fashion shows will show the direction this will take.
The next weeks will be determined by the results and feelings from the trips to Asia. The global price structure is not clear at the moment and with the higher kill in Europe to start soon, prices here should correct, at least for the regular material outside the high-quality end. The geopolitical situation could also change the situation in a day. It will require some weeks of good news to stabilise issues long term.
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