The leather pipeline - 10.12.13
10/12/2013
The year 2013 is slowly winding down. Christmas cards are prepared and also the financial community is not really willing to take any serious position any more. There is not much happening at the moment and the final week of the year will be a holiday, so there are just two weeks left.
The financial community has been observing statistics. The labour market in the US was positive, the European Central Bank left interest rates unchanged and in general nothing really has changed.
Possibly the most interesting subject was the hype around the bitcoin currency. If a virtual internet currency can attract this much attention and the Chinese government finds it appropriate to forbid the trade with it, there must be quite a bit of fear that something is not perfect with the existing monetary system.
Repeat stories about manipulation of interest rates, currency and commodity values continue to undermine trust in the monetary system and faith in banks and their management teams. The gap between the necessary activity of the financial institutions and the tolerance of the public is getting wider and wider these days.
The World Trade Organisation has reached a new free trade agreement in Bali almost at the last minute. Those who believe in the benefit of free trading will be happy; let us hope that the agreement will put a stop to the bureaucracy and protectionism that have returned.
Politicians use fear and the mercantilism to scare their populations and protectionism of any kind including export subsidies and customs duties are political tools that create a lot of long-term damage. Mere formalities are costing international trade and exchange of goods and services more than $1 trilllion a year. Even in the leather pipeline protectionism of many kinds is popular and causing extended problems to the industry. It remains to be seen if the Bali agreement will have any short-term effects and benefits.
During the past two weeks the US dollar has lost almost all of the gains seen since the beginning of November and has reached more than $1.37 to the euro. There is hardly any logic in the strength of the euro and watching the exchange rate over the past weeks one could be encouraged to believe certain market interests are at work, considering that the end of the fiscal year on December 31 will need one or the other specific market rate.
Oil was able to climb a little, which is also surprising given the physical supply and demand situation. In the three remaining three weeks of the year trade will most likely thin out further and less activity could see more extended moves due to less market liquidity.
Market Intelligence
The leather pipeline is running more and more into the doldrums. Most people are just putting this down to the holiday season, the end of the calendar year and the holidays in China afterwards. Well, 20 years ago we would possibly have agreed, but in this fully globalised economy the impact of holidays has reduced.
Shipping and production take a break if the order situation does not prevent this. This is the case in most of the automotive industry, where the order books are well filled and a number of brands and factories have decided to cut the holidays to the minimum possible. With other sectors one sees the opposite. Many tanneries in China are quoted as saying that if there is not a wave of orders for finished leather in the coming weeks, they might close for more than the normal 10-14 days at Chinese New Year (January 31); plans for up to three weeks’ holiday are mentioned.
However, this is only part of the business and tanneries have usually to look further ahead and this means – depending on the location – three to six months. Consequently we have to look less into what is happening today and much more into the indications we can see for the time starting from February. It is pretty obvious that most of the tanneries around the globe are already pretty well covered for the orders they have in hand. There is no clear indication about what volume of orders they can expect for the time after. At least at this stage, the leather industry has become very cautious about decisions.
In the past two weeks not much has really changed. Suppliers of cattle hides feel pretty confident that the slowdown in sales is only temporary and that what tanners are not buying now they will have to buy later. The market reaction is scant so far and when buyers try to push prices lower they just face resistance and are having very little success in convincing the beef industry and traders to let prices slide and come down. This tells us also that the discussions about supply or the kill and the supply of hides is not really what we should be talking about, but rather the situation with the suppliers. It’s the suppliers who decide where prices are going and how much product is really offered to the market.
We have found it worthwhile to monitor the market for calf skins, which has been the second bright segment in 2013 but is facing a lot of resistance from the buyers. This hardly fits, because everybody is still optimistic about sales of luxury products and all the big brands are reporting strong sales and order books, while the supply of suitable raw material is definitely not increasing. Consequently, everybody should be ready for further rises and we still remember the Lineapelle fair in Bologna when a number of people said they would not be surprised to see prices to 20% or 30% higher in the next season.
Isolated deals that are 5% to 7% cheaper than the prices in October have already been concluded. Only the real top names in the fashion industry are willing to spend at the price levels that we have reached and even they give clear indications that, despite their good sales and business, they see limits for the price they will pay for material. Secondly the growth in production may finally have outstripped demand from the consumer. What we want to say is that possibly more shops have been opened and shelves filled than real sales of the products required. We hear from a number of brands that they are not at all happy with sales and with inventory levels in their shops. This applies mainly to brands selling to other retailers, rather than to the brands that sell only through their own shops and distribution channels.
Another issue is the retail market in China, where reliable retail sales statistics are far less available. To cut a long story short, there are clear signals that many producers of leather accessories and bags are not willing to accept that material prices should go up for ever and many have shifted their production to cheaper, alternative products. If we are not totally wrong, this trend will continue in the coming months.
Another factor in the market are the sliding prices for lime splits; prices for lime splits, whether in Europe or in China, have definitely declined. The industry is still discussing the reasons. We are normally in the high season for collagen for the food industry and for many it’s hard to understand why the demand for collagen should be declining, and prices too. Well, in the end price is the major issue. The prices for splits, whether for the tanning industry or for the food industry, have gone through the roof in the last year. The collagen industry has taken note and has begun using pork or other substitutes. Pork prices have been declining for some time now and the price gap has just become too wide, so we see a correction in prices for bovine origins. In the leather industry the split demand remains still pretty high and many are still talking about shortages. However, in our experience we will either see a sharp rebound of collagen split prices or the price for wet blue splits will eventually also see a reaction.
From our perspective, splits are hopelessly overvalued anyway. Split became a logical more economical alternative a year ago and has made inroads into many productions and collections. With today’s prices we find it unjustifiable that splits will continue to be fancied in the seasons to come. So we would not be surprised to see demand and prices for splits continuing to fall as a consequence. For the moment the falling prices for lime splits in China and Europe are also a burden for tanners’ calculations.
For the general hide business it hasn’t really meant very much so far, because suppliers have not been willing to consider the trend yet and prefer to wait to see if the theory of ‘we control the supply and we control the market’ is going to work out once again in the first quarter of 2014. For the time being certainly not enough hides have accumulated to cause a scare and so not too many hides are being sold and many of the prices are being agreed in private than in public these days. This confirms once again that it is very difficult to trust the official reports and price lists that are circulating.
The bottom line at the moment is that there are indications in various sectors that the situation for raw material prices might not be as bright as many on the supply side believe after the fantastic performance of the market in 2013. Low interest rates are still helping and the existing production capacity needs to be filled, but if eventually this is not enough to sustain the present price levels things might change. This has very, very rarely happened in the first quarter of the year and so we will have to wait to see how things develop after New Year.
The skins market does not look very good for nappa. Prices in Europe for nappa skins, with the main destination China, are rapidly falling. Almost week by week the price is falling by a dollar and as usual in this market, price variations are very volatile and extended. It is pretty hard to understand why the skins are so out of fashion at the moment because everything else is so expensive. With the present prices for lamb and sheepskins the square foot of leather is so attractive and so much cheaper than any other alternative, that it would be a surprise if no one in the garment or other sectors discovered this raw material option very soon. It is again the very low flexibility of the industry these days that stops companies from taking up new options quickly. For the moment there is very little support in sight because the Chinese New Year is ahead of us and is slowing the market down. Also, let us not forget that traditionally the Chinese are not good buyers in a falling market, so they will most likely stay out until they see the bottom. However, with everybody complaining about profitability, people should realise the great purchasing opportunity that has been building and developing since the beginning of November.
In the coming weeks we can only wait and hope for another wave of buying from Asia, because only those tanners have to think about their production pipeline from February onwards. From our perspective most tanneries should be covered with raw material already for the weeks following the holidays. However, within a time window from week 51 to week three of the new year, they have to decide how to fill the drums from the second half of February onwards.
This decision will most likely be seriously influenced by leather orders received in the coming weeks. The general tone in the industry is: we would rather cut production than produce leather at a loss or for stock. Only the automotive pipeline has a clear picture and they will remain very busy in the first quarter of 2014. The rest are taking a more cautious look and it’s possible demand may shrink even more than sellers are expecting. For non-US suppliers, the currency trend will play an important role too. In summary, we actually do not expect too much price variation, but if any it will be on the downside and we once again believe that a correction in prices anywhere will be between 5% and 10%.
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