Market intelligence - 1.10.13
01/10/2013
The past two weeks did not deliver too many highlights as far as economic data is concerned. The main topic of interest was the decision of the Federal Reserve in the US to continue pumping cheap money into the economy, believing it is not yet robust enough. The markets were not really prepared for this as everybody expected it would begin an exit strategy.
The US dollar lost some of its value and this might have been a desired side-effect of the decision. The US economy is not delivering any clear direction; consumer confidence is not really picking up, although the labour market is showing fewer people looking for jobs, which is good news.
In Europe, we had elections in Germany which did not deliver any clear majorities. Political parties are struggling to find a compromise for a coalition. This is not concerning anyone because everybody believes the leadership will remain in the hands of Angela Merkel, but it could eventually go to vote again.
In France, where the political majorities have shifted towards the left, conditions have not improved and if Germany takes the same direction this might not be the good news many in the southern part of the continent are hoping for.
However, the financial markets haven’t taken much notice and neither stock markets nor commodity prices have moved much in the past two weeks. With the exception of currencies, most other items are bouncing up and down in pretty narrow ranges.
The situation regarding Syria seems to have eased and Russia and the US are trying to manage it without losing face.
The new leader in Iran is trying to ease the tensions with the West and it will be interesting to see how serious the attempts are. The latest terrorist attacks in Nairobi, Kenya, have shown how important it is to find political solutions and to reduce financial and political support to any radical extremists.
Market intelligence
The second half of September presented itself as it usually does. Most people in the leather pipeline are busy sorting out what the final leather orders for the winter semester are going to be, what the prices are and figuring out how retailers are planning their business for the coming six months. This varies from country to country because of the seasonal influences. Christmas in the Western world and the Chinese New Year have a strong impact on consumption, while the weather remains the usual unknown.
Opinions about the general situation of private consumption around the globe are drifting apart, particularly in the various segments of retail. This is nothing new, and has been discussed a number of times in 2013.
The leather show Le Cuir a Paris showed further growth and confirmed how important the luxury sector has become for the production of leather. All the leading brands are pretty happy about their business and they are expecting growth for the medium and long term. Companies are adding leather collections and those which sell shoes or bags are expanding their offering. This is good news for leather and explains why the demand for high-quality raw material continues to be strong and prices break one record after the other.
Even when some of the big brands are complaining about prices for leather there is no sign that they are going to walk away from natural beauty and quality. However, there are limits in terms of price and supply and sooner or later the big brands will have to deal with it, in particular when production and sales are growing and more brands are trying to grab their share.
A year or so ago we were wondering whether the market for handbags, luxury shoes and accessories could see some saturation, but there has been no indication that the shopping frenzy for these kind of products is going to come an end. Even the Chinese fight against corruption and bribing and the gift-giving culture has not really turned into any kind of a remarkable decline in demand for these small luxury items.
The next bright spot remains the automotive industry and all information is indicating the production of cars equipped with leather interiors will stay at the same or even higher levels at least for the rest of 2013. There are indications that here and there cars are not selling as quickly as they used to, but manufacturers are pretty optimistic about the demand in the emerging markets. New models and more upgrading leads us to believe the demand for automotive leather will be high in the coming months. There might be shifts in quality, there might be hard fights about pricing, there might be shift of production locations, but generally the production of automotive leather is not going to decline and it might even continue to increase.
The fashion shows in Milan, Italy, had more leather on the catwalks than you see in the shops. Some brands were experimenting with leather as a material, which we have seen in previous years. In the luxury segment, leather has always been and will always be an important material and in particular the shoppers in the East are rating leather more highly than in the traditional markets in the West.
The situation for commodity leather is still pretty unclear. There are a lot of conflicting opinions over whether the sharp rise in raw material and leather prices in the first half of 2013 has had a strong impact on leather demand for the coming season. You can find support for both opinions. Some are openly talking about declines of between 10% and 20% of their leather orders due to price and say shoe manufacturers in particular are reducing their leather consumption. The GDS shoe fair in Dusseldorf proved some of it and leather substitutes were frequently seen in designs. Others are pointing out that the forecasts of shoe retail are quite positive and the material consumption is not going to be less on a global scale than it has been in previous seasons. We consider this to be the key question which needs to be answered to know how the leather pipeline is going to perform until summer 2014.
Business activity in raw materials has been reasonably quiet after the flurry of interest at the end of the summer and around the Shanghai fair [All China Leather Exhibition] at the start of September. China had a short holiday and a longer one will start this week, and most leather producers seem to have covered their immediate needs for raw material until they know exactly what they can expect in the months to come.
We continue to believe that politics are ruling the market more than the fundamental balance between supply and demand. Like in many other commodities, producers are trying to strengthen their grip on prices and there is a discrepancy between talks and the published facts. It has become pretty obvious that a number of the dominating raw material suppliers for bovine hides have bitten the dust and have taken lower raw material prices than have been published. This has given them the chance to get their product flow intact and the recent export statistics from the US have confirmed the enthusiastic comments about sales prior to and during the Shanghai leather show. However, the question is how much this is synchronised with the real leather demand and production in the coming months.
It remains unclear whether the hides that have been bought are covering existing leather orders or have been taken in anticipation of what is to come. This again is directly related to the question of how much leather demand is influenced by the high prices seen in the recent past.
We are now heading towards the next leather show in Bologna, Italy, where a lot of key players will meet and we might be able to get a better impression of the market. Usually around the middle to end of October most of the fundamental decisions are taken and things should become clearer again.
The bovine markets have been supply-driven for some time and it seems that this is going to determine business for the near future. In the US, the higher seasonal kill has finished while in Europe the numbers are going up. This delivers another interesting situation. The weaker US dollar and the more adequate prices from the US have invited an increasing number of European tanners to shift from the very expensive European material and to consider overseas hides in larger volumes. It is true that they do not arrive in the next week and so some of the production gaps have to be filled with European hides before the others reach the drums, but some impact on the demand for European hides should be seen by the end of this month.
With rising kills in Europe, it could become an interesting situation in November when more overseas hides cover production and fewer European hides are required. This could also become a situation in Asia with all the hides filling the drums and European suppliers, traditionally not being that far forward sold, looking for customers.
In the past few years the raw material market has been pretty tricky in the final quarter and there are indications it could happen again this year. However, butchers and suppliers might have learned not to become too desperate in selling and lowering the prices, knowing that in the first quarter a decent upswing can normally be expected.
The split market is running as hot as before and split prices continue to rise and please tanners in the calculation of their grain leather. As a result of the high prices for hides they had been one of the first choices to lower the budget for leather purchases of shoe and automotive companies. The season for higher collagen use is also beginning and so one can only remain optimistic about the near future of the split market.
The skin market remains mixed. The luxury end and niches like special decoration skins or high-quality linings are still in good demand and interest for the product remains stable. The standard nappa skins and in particular the market in China is still undecided. Tanners have not been happy about the interest and performance so far and are now desperately waiting for an uptick in demand after Golden Week [a week-long holiday in China beginning on October 1]. There had been increased display of nappa leather recently in fashion shows, but standard fashion tends to use artificial fibres over leather, with the ‘real thing’ reserved for the high-end fashion brands.
In the next weeks we will see most of Asia on holiday and the following week most of the trade gathering in Bologna for the Lineapelle fair. There will be time and opportunity to analyse and discuss the situation and outlook, but it does not seem that this will deliver much more news. It seems clear to us that the high-end business remains pretty good, automotive orders and production plans are fixed and high for the rest of the year and price remains the dictating factor in the shoe and upholstery segments. For the moment, most players have accepted the facts of the market and we believe that leather orders will not meet the same volume we saw seen a year ago. It will now it depend what the supply is going to be and how the packers around the globe are going to deal with the situation.
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