German Perspective – 13.5.14
What happened this week: After last week, where one had the excuse of the holidays, this week had to be considered to be a normal one with a normal valuation of the market activity and players had to face the realities. The realities were sudden market reactions and reports early in the week of sales or resales of cows in the north of China at serious discounts.
The rumours of price discounts of $8-10 versus the levels at the beginning of April were verified and many agents were reporting larger block deals from Dutch suppliers at these levels.
As the week progressed, people with money got aggressive and were testing the waters with bids another $5 lower. However, we are not aware of anyone willing to bite just yet.
It is quite difficult to evaluate where the market level for cows is. In a market of turmoil, all kinds of prices are thrown around and nobody can evaluate if they are true or not, or what kind of product they really represent.
In Europe, the long, firm market trend had made cocktail mixing and a massive 'flexibility' on weights pretty popular and a lot of traders in various countries had a good time stretching the limits when prices were substantially rising between contracting and shipping. We always believed that these kinds of revenues are at best just borrowed and the repayment times are always coming - although we have to admit that it took far longer than we thought this time.
The hide market has presented its ruthless face again in the past weeks, which is what we were afraid of for some time. It was an outside trigger, but it was showing the true fundamentals and the dangerous and incorrect valuation of many hide types.
The situation in the north of China hasn't changed the global leather demand and we will eventually see where the real balance is. For the moment, shippers with a large exposure to China will have a difficult spring and maybe summer while the demand for hides and the leather business in other parts of the world remains normal.
In our case, this applies to bull hides, demand for which remains intact due to the steady demand from the automotive industry and the higher-quality shoe tanners, and the market has not yet been infected by the virus of the cow market. However, the overlap of possible substitution of raw materials and the new valuation of cow hides from various origins in addition to falling prices for bellies, shoulder and splits will possibly leave traps in the other markets - just with a bit of a delay.
The meat industry is not yet admitting any changes in the markets and takes the stable situation for heavy males as its reference. However, it is just a matter of time until the market rules apply. For a general market evaluation, the global leather demand has to be evaluated and we tend to believe that leather as a basic material is in retreat. It has become too expensive and this means that either cheaper or less leather is planned for the coming season. A slow, steady process.
The political situation with Russia and the Ukraine will also affect total consumption and the big retail boom in China seems to be taking a break. New cost structures will apply and they are not positive for raw materials.
Sales this week were mixed. In Europe business was steady, but overseas buyers were bidding too low for our taste and so we let a lot of interest go. It was a time of cherry picking. We were picking a few of the sweet ones, but this was restricting volumes.
All in all it is only the lighter-weight cows which are causing headaches to find a market, a price and a buyer who pays. The other grades are slowly but surely finding homes, with prices for bulls on a steady level, heifers moderately lower and light cows… nobody really knows.
The kill: The kill was a fraction better this week, but just at what you would expect at this time of the year. Numbers are and will remain low with steadily falling weights. Germany killed about 5% more cattle in the first quarter, which is contrary to the general opinion that the number will always fall from year to year.
What we expect: The market will need some time to digest the new situation. It doesn’t seem that the surplus of cows has been cleared and so this market will remain in the spotlight. Where the bottom is nobody knows, but tanners would be well advised to buy small volumes not miss the chances. For the rest, the kill will be the deciding factor, because demand is stable. So, cows still weak and the rest steady to a little softer, always ready for surprises.
