Market intelligence - 29.10.13
29/10/2013
The labour market in the US showed less strength than expected. This made investors ‘happy’ as this leads to cheap money and less liquidity and keeps higher interest rates further away - the method we have seen for more than five years since the global financial crisis took hold.
In China, an increase of the purchasing manager index was reported as well as an increase in growth in the third quarter, which lifted hopes that the economy remains on track. However, worries about the financial sector in the mainland were evident as well as doubts about the statistics. Many are of the opinion that the government is skewing the numbers to achieve targets in view of some major party assemblies later this month. In any case, the growth was mainly from large government projects and investments. Exports are lagging. Local money market rates were pretty high again, which is a concern for the private sector.
As a result of the situation in the US, including the negative impact on growth, the US dollar fell and it seems this is could be what the Federal Reserve was looking for. Being almost independent from energy imports due to rising oil production, the weak dollar helps exports and makes the US a more attractive location for investment.
Stock markets welcomed the prospect of an extended delay of any tapering, and liquidity was invested into shares with most of the leading indexes rising.
In Europe there were also some silver linings with Spain seeing a stabilising economy (on very low levels and high unemployment) and Germany steaming ahead. Investors showed intentions to invest into the euro as an alternative.
Despite the money supply, precious metals and oil are not performing as one would expect. Prices for metals gained a little and oil prices went even lower with oil production still exceeding demand, which good news for the oil importing countries before the winter season.
The last two months of 2013 could see more volatility in the financial markets.
Market intelligence
We appear to be in a period of transition in the leather supply chain and it is worth recollecting some of the contributing factors:
• The financial crisis, beginning in 2007.
• Massive liquidity injections into the global economies and low interest rates.
• Europe, Japan and the US using ‘cheap money’ to counter contractions of their economies and unemployment. The measurements to curb budget deficits are reducing spending power, amplified by higher taxes, energy and food prices.
• ‘Cheap money’ boosting commodity prices, helping many of the raw material-exporting emerging markets, as well as wealthy investors who were able to balance the losses from 2008.
• In the emerging markets, growing wealth, and consumers spending freely.
• The widening gap between rich and poor.
• Beef producers increasing vertical integration, leaving less raw material for tanners.
• Increasing wealth in emerging markets boosting demand for luxury products.
• Growing demand for luxury cars increasing automotive leather production; a shift in sectors and increasing competition for the raw material sources.
• The weak performance of the European consumer markets has left the average-quality producers with shrinking sales, particularly in the upholstery sector.
• Reporting and price information have become more a steering tool than a real reflection of the market.
• Restricted lending from banks in Europe has made access to finance far more difficult with the consequence that the supply chain runs hand to mouth.
• Finance of small to medium-sized enterprises in Asia is getting tight resulting in more grey-market finance, with increasing risk.
• Global leather demand was growing until leather prices began to exceed prices of potential substitutions.
• Improvement of finishing technologies, enabling better use of lower-quality raw material.
• Improvement of synthetics, which makes leather more easily substituted.
This year, the market has been dominated by the rise in automotive production and the demand from luxury brands. Both have been setting the pace, consuming more leather than ever, dictating price levels and making the rest of the world believe that leather could reach new valuation in the material mix.
The rising consumption of leather has boosted raw material prices. Whether the added value is shared fairly is another story; it is determined by the negotiating skills of the opponents. Some brands are so optimistic about the margins in leather production that they have bought the tanneries of their former suppliers.
Despite complaints about high prices and margins, the top end of the leather suppliers do not give the impression that their business has been threatened due to record raw material prices.
It is a different story for standard items. Shoemakers and furniture producers have to consider price rise. Those in the commodity sector have to find cheaper alternatives if they want to handle the price targets set by buyers or to meet the prices of the ‘cheaper’ competition. A good example of this was seen in the split market: for those who bought the story of limited raw material supply the only exit was man-made materials.
The world is consuming more and this also includes products made from leather. There would never be enough raw material to make all the traditional articles from leather, for instance athletic footwear or upholstery, so substitutes are necessary.
With every generation, the importance of leather as a material declines. For young people, leather is not particularly significant. Many do not appreciate the quality and function in footwear, which results in it being substituted. To make leather appreciated, the qualities have to be recognised. There is more leather produced today than ever, with the technology available to make it look flawless. It is easy to cut with the best cutting yield, allowing the cheapest labour to handle it. However, as long as leather and man-made products look similar it will be a battle on price, which is not being won by leather at the moment. Most raw (bovine) materials cannot justify the price levels they have reached.
It has turned into a price battle in low-cost production countries and a survival of the fittest in others, with the result of declining production capacity, because of failure - or governmental decision, in the case of China. For the material suppliers is essential not to go for the best price, but for financial stability or the best performance.
The split market is twofold. While the leather industry remains hungry, the collagen and gelatine markets are showing some weakness as far as bovine resources are concerned. Cheaper alternatives are gaining market share and putting pressure on lime split. Whether this is a trend or whether it will be compensated by the strong performance in the leather industry needs to be seen in the coming weeks.
In the skin market, the premium supplies of double face are performing pretty well. Prices remain high. Standard products are suffering. The recent sacrifice slaughter [for Muslim festival Eid ul-Adha] has put enough material on the market so international imports are not needed. In particular, Chinese leather garment manufacturers are complaining about a lack of orders and hope that domestic and export orders for nappa will pick up.
For the coming week we do not expect the strong performance many sellers continue to predict. In our opinion, a lot of the needs until the holidays are covered. Only speculation and/or position taking for the next year could stimulate demand. While in the US, the supply card due to reduced slaughter is played, in Europe the higher killing season is ahead. The currency market will also play an important role how the markets develop.
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