German perspective - 8.10.13
08/10/2013
This is also the period of full production for most tanneries around the globe as well as a period of higher demand for hides which generally lasts until the end of the first quarter of the following year. Most of the trade - sellers and buyers - are trying to dig their heels in, because it is extremely important to get the beginning of the season right.
In many years the final quarter - due to higher kills in Europe and a decent inventory position of tanners in Asia - has shown a weaker price trend followed by a swing in the first quarter when tanneries need to cover the rest of the busy season and the kill gets lower around the globe. It is when the southern hemisphere is taking the long summer break, Europe and the northern hemisphere miss the kill during the Christmas season and after the New Year consumers take a break in beef consumption. Most suppliers around the globe try to learn from the past and take a strong position early to prevent the market from any downward correction into the final quarter of the year and they will most likely play it hard again this time. However, conditions in various markets are different and it is difficult to generalise.
The partial government shutdown in the US might have an effect on business, but for the moment the first result is a falling US dollar: US hides are becoming more competitive and others less so. If this trend does not change quickly it could become a shot in the arm for those who did not take the effect of currencies and economics into consideration: we have seen these factors sometimes have more influence on the markets than the supply and demand balance itself. Last week the impact was limited, but preparing for the next abattoir negotiations and the meetings at Lineapelle leather fair, Bologna [Italy, October 8 to 10], it might give some people something to think about.
With the new currency levels the valuation of European export hides is becoming another hit. The market has become the playground of the big players with interests on both sides of the table which is not helping smaller tanneries. Not being in the prime line of buyers and not being part of the political sales, it is getting increasingly difficult for them to find a base for their raw material calculation. This is an issue not only in the hide market but also in other commodities. We see a market that is dominated by segments and size. While segments of high-added-value chains can easily justify their price, the segments where only size matters are much more complicated. So far, the games have worked for both sides, but if the fundamental balance between supply and demand is disturbed it will get tricky. For the moment the essential question concerns whether leather demand is going to be affected by prices. It has suited some on both sides that the recent mixture of pricing and reporting has stabilised the market and prevented a number of players from inventory losses.
Sales this week were difficult. There was some Chinese interest for dairy cows, but it took days to bring low bids to levels that could be considered to be finally killed by the falling USD. Consequently there was a sufficient amount of interest for cows, but an insufficient amount of profitable business. Heavy bulls are still running their course, but the higher kill is beginning to ease the supply bottlenecks. So, one pushes the prices due to added-value reasons, but not so much for the reason of limited supply. Prices were steady for males while revenues for cows suffered for currency reasons.
The kill: The daily kill continues to rise. Weights for males continue to rise too, which is not a surprise as the number of bulls in the feedlots was significantly higher at the beginning of the summer and the time they have to reach the abattoir is restricted. This makes us believe that the kill of males will remain good for some weeks.
What we expect: Since the market at the abattoirs and the market of the international leather industry are totally disconnected, anything can happen. It is all about fresh hides’ market share and not about a margin or contribution margin. If the USD does not rebound soon, hide revenues in euros will shrink. Forward sales for bulls might delay this, but cows and lighter-weight hides cannot escape from international price trends. Asian buyers are unlikely to raise prices for EU hides despite the firmer prices in the US.
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