Market intelligence - 15.10.13
15/10/2013
In the past two weeks, most of the attention of the financial markets was on the partial shutdown of the US government after Congress missed an October 1 deadline to pass a budget. Stock markets saw only minor corrections and the fall of the US dollar capped at 1.36 to the euro. In the past week, as the debt ceiling date approaches (October 17), the global community got a little bit more nervous and were urging the politicians in US to end the dispute. We hope everything will be sorted soon to prevent serious problems which could affect the global economy.
In the meantime, President Obama has nominated the successor of Ben Bernanke, former chairman of the Federal Exchange. Janet Yellen will continue the easy money policy, which is good for the financial markets, but possibly bad for the long-term stability of the monetary system.
There has been very little financial data published in the past 10 days but the most interesting might have come out of China. Chinese exports dropped significantly, even though they had been predicted to rise by most analysts. This puts a question mark over the recovery of the Chinese economy and financial markets will be looking to see if this is a one-off or if exports are really falling.
Most commodities held their values pretty well, with oil prices continuing to bounce around the $100 and $110-per-barrel level, with just precious metals continuing to slip. Gold can barely hold $1,300 per ounce and silver is getting close to $20 per ounce.
Market intelligence
The leather industry gathered in Bologna, Italy, for the Lineapelle fair last week [October 8 to 10]. The show is one of the biggest and possibly the most influential when it comes to leather articles and trends. High street brands, fashion designers and trendsetters took the opportunity to meet customers and colleagues for a chat about the situation in the leather pipeline.
Generally, the attendance seemed pretty normal, neither being exceptionally busy nor slow. The Chinese holidays the week before might have kept the usual number of Chinese visitors on the low side. The first two days were pretty busy and the last day, as usual, was much quieter. We noticed some of the stands of the leading producers from Tuscany had grown in size, which may have meant fewer exhibitors, creating more dominance by the handful of really successful producers of high-quality leather.
There was no sign of particularly new trends. The fashion, top-end and luxury producers were still focused on natural leathers in rather conservative colours for the next winter season. Classy, natural and high quality dominates the high-fashion end. We expected to see more corrected grains, possibly even some lower-quality leather to clear the rising stocks of medium or lower-quality material. We saw very little of that and this means the rising demand for top quality and the price pressure on medium and lower-end productions will have to wait for another season to find a solution.
This reflects the story of the entire leather business today. Certain leather types and sectors are doing exceptionally well but between raw material suppliers, tanners and leather users, it is unclear who should be getting which share of the added value. There is enough to share and so it becomes a fight between the parties. As an example of how difficult it can become, one only needs to look at calfskin prices: the premium, heavy ones are breaking record after record, while at the lighter end there are hardly any buyers.
A similar situation can be seen with bull hides in Europe where the heavy hides, used for vegetable tanning and luxury products or for automotive leather production, obtain more money per kilo than the light ones, which usually deliver better yields and justify a higher price.
Talking to most of the industry, leather demand remains stable and therefore so does demand for raw material. Most of tannery drums are turning, but many tanneries are not making any money, which is the greatest concern one hears. The main reason is the change in the various sectors using leather for their finished products. There has been a constant rise in the appetite of the automotive industry and with the limited supply of hides, other sectors have to leave the raw material to the strong performers. We have mentioned substitution a number of times and this is what one can see in the upholstery and shoe industries.
The furniture industry has proved to be most price sensitive and the low and medium end cannot compete with the financial resources of the automotive supply chain. In Europe and China, the production of classic, corrected-grain leather furniture is declining. Only the high end can successfully compete, mainly because this sector is much more flexible than automotive leather.
In the shoe industry, wherever possible, leather is being substituted. For the sports shoe sector this is easiest as PU has been an accepted option for a long time. This is now shifting into children shoes and casual footwear, as well as ladies footwear.
With the growth of global private consumption and the performance of the automotive industry there is no risk that the raw material industry will get stuck with the by-product. The issue is just pricing, and we are returning to a similar situation as the first half of this year. On the back of strong demand and speculation, prices rose and exceeded the critical levels in spring. The smart sellers in the beef industries of the Americas realised they had overstretched the market which was not ready for the levels far beyond the $100 level and so they managed the market down to give their customers the chance to average their inventory down for the start of the new production season. The US dollar helped, keeping competing origins in Asia less competitive and so deals could be arranged without too much intervention from outside.
The top 50 or so leather producers will have worked this out. The average raw material purchasing price in the past six months in combination with an increasing split credit should be still be good enough to refrain from losses. It might have been a bit harder for the guys outside the top 50. It is unlikely that they got the chance for the ‘lucky deals’ and so only the smart buyers with good financial resources might have been in the position to handle the prices and inventories in the same way.
Those which missed the opportunities in August might now have time to catch up. Packers are happy to have their product flow due to the large ‘political sales’ and buyers who took their chances are happy seeing higher prices in the reports for their negotiations with their leather customers. They have enough inventory at acceptable average prices to handle the price situation.
It leaves the question of whether these big deals between the dominating sellers of the beef industry and the dominating buyers in the leather industry are representative of the market. It is obvious that we are in a period of a squeeze-out, not only because of the situation in the raw material market, but also because of the structural changes in the industry.
The Chinese government has become serious about environmental issues and more and more tanneries will close if they cannot meet the regulations. Some move to other regions, others invest in modern facilities which are connected to wastewater treatment plants. For those tanneries where effluent clean-up is a prohibitive cost, the next step is looking for investment or contract production in areas where local government regulations are less strict. However, this is not a solution for the long term: even if the cost of production is lower, transport and logistics costs take away some of the benefit.
There are still a large number of tanneries producing leather but many of them do not have the same cost advantages as big organisations and their access to adequate raw material sources at the same prices as the big ones is limited. This is mainly because the big producers try to sell direct to the equals and that leaves the product flow through traders the smaller enterprises increasingly restricted, which makes it extremely difficult for the others to generate stable margins.
This could become an obstacle for the market because the strategy will only work if the big enterprises grow production at the same rate as the smaller ones decline.
The split market has been performing well and in particular wet blue splits were able to maintain record levels. In the collagen market, we hear from a number of producers that the decline of prices deriving from poor production has also left its mark on the bovine split market. A number of tanners are reporting that they had to take price reductions for their collagen products if they wanted to move the production as easily as in the past.
We do not see any major risk to the split market as long as the prices for hides do not come down. However, a correction would not be a surprise, because many split prices cannot be justified, looking at the prices for cheaper and lower- quality hides.
The skin market did not deliver too much excitement. The top-quality skins used for double-face production and the top end of shoe linings and accessories maintained their high prices and tanners in this field are reporting a decent number of orders.
For the standard product, prices are not varying much. The good news is that the demand for wool continues to be strong and prices are rising. This should make fellmongering businesses profitable again and it should allow for the sale of tannery wool which has been accumulating in fellmongering centres around the world. Prices haven’t changed much recently and it doesn’t seem any major variation can be expected in the weeks to come. The Muslim festival of sacrifice (Eid al-Adha, October 14 and 15) will bring more raw material to the market and this should see the supply of skins being adequate for some time.
There should be some slowdown in activity in the next few weeks. The period of trade shows for leather, accessories, furniture and shoes is behind us and most of the deals have been made. Sales and productions teams will most likely sit around the table to decipher the production needs for the coming months. Looking at the raw material market in the past four to six weeks, one has to conclude that both sellers and buyers have done what they needed to do for the coming weeks. Production and shipments should be at pretty high levels until the end of November, because the production window due to the holidays this year is dictating high level of activities until mid-December. The Christmas break in the Western world and the early Chinese New Year in Asia leads us to believe that we will have a slowdown in production and shipping from mid-December until the second week of January. This has to be reflected in the production plans and might have more influence than usual this year.
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