The Leather Pipeline - 21.1.14
21/01/2014
As far as the financial markets are concerned, 2014 has started relatively slowly. In the US, another government shutdown was avoided by the political parties agreeing a new budget limit. Many players are wondering whether the Federal Exchange is going to continue with the tapering measures and if the recovery is enough to boost the labour market and put the economy back on track.
In Europe, the recovery is more solid. Government bond yields continue to fall and the spread between the interest rates of the strong countries and their weaker counterparts continues to shrink. Countries such as Ireland have already been upgraded to investment level and Portugal, Spain and Italy are able to refinance on the capital markets at continuously better rates. Levels have almost reached pre-crisis rates.
There is a bit of concern about the emerging markets, which are showing the weakest performance. Of the BRIC [Brazil, Russia, India, China] countries only China is performing according to expectations while Thailand and Turkey’s weak currency is taking effect.
Generally, most of the big global organisations such as the International Monetary Fund are moderately positive for global growth and most project increasing growth for 2014.
After the fall of most commodity prices in 2013 with many of the standard commodities falling up to 20%, prices have stabilised and analysts are not sure what they should expect for this year. Most have forecast pretty narrow ranges around the present levels.
In the currency markets, the Japanese government continues to weaken the yen, Chinese yuan continues its moderate appreciation against the dollar and the euro fell a fraction against the dollar after pretty low inflation rates in the West were published. Many analysts expect the European Central Bank to lower interest rates by March. If the US economy recovers and there is low inflation in Europe, the dollar could attract investors’ attention and might see further recovery. However, we all know how fragile such prognosis can be and how little is needed to change investors’ opinions again.
Market intelligence
The leather pipeline also had a pretty slow start to 2014. Many might disagree and point to the very strong export sales figures from the US a week ago. Many of the interested parties have used the statistics to support the opinion of the market gains for bovine raw material. Everybody monitoring these markets knows that there are enough large groups to sustain the upward trend of prices.
However, one should not forget that in the last quarter of 2013, the total number of hides produced was hardly ever cleared and so one week of excess can hardly justify the story of limited supply and large forward positions of producers. After the correction in late summer 2013 they have been able to initiate a very strong recovery and official price lists are showing a crisis, hitting the record levels seen during spring and early summer last year.
We have learned our lesson and know that it is pretty useless to argue about the market and price publications. Only those who are really in the middle of the trade can see from their emails and phone calls the real prices. Nobody wants to be quoted these days, because many have got specific and individual interests in prices and market trends and too much is negotiated behind closed doors.
What we know for sure is that the spread of prices for raw materials might be larger than ever before. We have been present at a number of formula solutions in the past few weeks and the difference between the asking price at the beginning of the discussion and the final price was more than 5%. This is pretty unusual in periods where the official price lists don’t change by more than 2% from week to week and most players are trying to suggest steady conditions to the public.
One finds it pretty difficult to know the actual volume traded and at what price. Normally a fair average price should be quoted by a fair average of volume and prices, and not be the pick of the week which is mostly what the seller states.
We have dealt with the subject a number of times already, but the price trend continues to benefit the large players and this, from our point of view, is the main reason prices continue to be moderately higher every week.
How does the leather industry answer the market conditions? Many leather manufacturers understand that the raw material market is pretty well controlled and supply is much better managed these days than it has been in the past. Their suppliers, the tanning industry, have not been able to aggregate enough purchasing power to have significant influence on the raw material prices, which was the general picture for 2013. On the other side, the retail markets are not allowing enough or sufficient price increases to allow leather prices to compensate for the raw material levels.
The consequence is many brands have chosen to set limits on the leather price they pay and to change to articles which fit into the price range. Either there is another supplier that can meet the price or the leather article has to be changed. This has been highlighted by more and more tanneries downgrading their raw material qualities either to solve the problem technically, to make a similar or lookalike article from cheaper raw materials or to agree with the customer on different leather types which can be produced at the target prices and market expectations.
This is usually a slow shift and this does not happen from day to day or week to week, but one can clearly determine that the tanners are moving away from the expensive standard articles. The Asian tanners are now preparing for their New Year holidays and it seems that many of them have last week covered what they needed for their production after the holidays. With increased asking prices there is a good chance that the buyers will stay out of the market until their return to see if prices will settle.
If tanners dispose of enough raw material in the next two months of production, the first quarter of 2014 could become an interesting period, because normally the market is supply-driven in the first quarter with a climax around the Hong Kong leather fair at the end of March. This year could become the one year out of 10 when this does not happen.
At this stage in the middle of January it is still a bit premature to take final decisions, but a month from now we should know more, because then the majority of the consumer trade shows will be behind us. We have had the furniture fair in Cologne, the shoe and accessory fairs in Italy and France, the automotive show in Detroit and a number of fashion events in Europe. We are still waiting for the leather fair in Chennai, India, at the end of the month.
So far the results have been positive in regard to consumer demand. There has not really been a single event so far where exhibitors or visitors were negative and most painted a positive picture of their business outlook for 2014.
The leader of the pack is the automotive industry, which is setting the target for two million cars produced in the current year. In particular, the premium brands continue to be the most optimistic ones and they are the biggest consumers of leather too. At the same time they are ones which are the hardest to deal with. Showing the biggest appetite, the safest potential for growth, positive results and positive margins, they are the most unwilling to discuss solutions. They insist on quality levels and guarantees and expect long-term price commitments which have been difficult in the past and are nearly impossible in the current market.
The shoe industry is certainly not easy when it comes to price negotiations, but they are far more flexible on quality of articles. Handling the leather types and grades has always been the solution to the price problems the leather pipeline has been confronted with in the past.
With the suppliers being totally rigid on their position on the value of their main by-product and the end users being rigid on what they want to pay for it, the industries in the middle are stuck in a difficult situation.
There is very little indication that either side is willing to find solutions and it has become a battle of power rather than looking for solutions which both sides could handle.
We will have to continue to watch the financial side of the business as just last week another tanner in Spain decided to look for protection against his creditors and banks and presented the books to the courts. We are hearing from many markets that new leather sales can only be generated by extreme extension of credit terms. This is normally not the sign for solid leather demand, but rather the solution when the pipeline is not flowing and sales are not raising enough cash. This gets even worse in times of rising costs and consequently more finance is required.
The split market remains still pretty firm for wet blue, but is still facing pressure for lime splits. In particular in China many tanners hope for another strong season for splits, because the decline in lime split credits of 10% to 15% in November and December is causing further problems in their calculations.
Leather orders from the domestic shoe companies has been pretty promising recently and this is making the industry quite optimistic that prices will recover after the Chinese New Year and the spread return will get back to the levels seen until October 2013. This would be logical when we look at the prices for wet blue splits which are still at record levels and nobody is complaining about demand.
The skin market remains unclear. The warm winter so far in China, Russia and Europe has destroyed the hopes for a strong sales season. Even if the weather turns colder it could be too late to rescue the season. The fur market has been feeling the pain and some of the fur auctions in December dropped substantially. The fair in Beijing this week has also not created much more optimism.
The standard nappa market remains difficult. Despite the general trend of the raw material markets, standard nappa skins have performed poorly and since mid-2013 prices have fallen by between 20% and 30%. Some report large unsold stocks of skins in China and slow demand for pelts and nappa leather. During the holiday season we don’t expect much of a change with everyone waiting for a better time and with the price problem in the bovine sector, ovine leather could see rising market opportunities.
We are now entering the holiday season in Asia. We think this could become pretty decisive. The leather pipeline uses the internet and if tanners need more hides they will be able to stay in the market even when there are closed. Consequently, their attitudes will tell us much more about the real inventory position, the leather orders, the prices and the expectations. Mid-February, we will know more.
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