German Perspective - 20.5.14
20/05/2014
Several buyers were bidding aggressively further down, but we tend to believe that most of these lower bids were rejected. The good news is that there was plenty of interest around and enough buyers willing to pay prices close to the levels that had been established the previous week and which are about $8 below the peak levels seen around the Hong Kong leather fair [APLF, end of March].
With enough interest coming in through various channels there were enough bids to choose from and to find clients, who were taking the opportunity to replenish inventory at lower prices.
However, there was no rebound in prices. The market was able to defend the levels, but if one was looking for a cent more the interest vanished immediately and people postponed.
In the end it was obvious that EU cows were one of the most interesting items to buy. The question that began to develop towards the end of the week was: where are all the hides purchased going to be tanned? Agents and customers were saying that alternative tanning locations had been found.
This is adding to the confusion about the impact of the shutdown in Hebei province. Unfortunately, we could not obtain any clear picture about the situation. How many of the contracts reported are new and how many are resales? Is the tanning capacity available right away and will all the volume be shipped within a short period of time? These questions need to be answered.
It is also interested to monitor how the other supply origins are going to react. Australia is said to be well down too, the US reports serious cracks and within Europe there are plenty of hides around of the less regular and reputed origins. South America and in particular Brazil needs serious attention too. If they all follow the same trend we could enter the summer in a downward spiral where the last weeks were only the beginning.
As mentioned last week, this all depends on leather demand and if all the hides that have now congested are absorbed quickly enough to lift the pressure to prevent more forced price reductions.
The tanners see their opportunities and seem to have lost their fear of a sharp raw material price correction.
Most sellers are, however painting a different picture. They see leather demand to be strong, leather prices to be sufficient and the price trend only to be a short term accident which will be corrected soon. It is going to be interesting to see who is right and it is possibly wise not to take any major positions in either direction.
In Europe the situation is different. The male kill has fallen sharply and after the strong kill and increases in the first quarter we are now seeing the opposite.
With the steady demand from the automotive and high-quality tanners, prices were stable despite the general market turmoil.
Sales were good enough to move everything one wanted to sell. We would even say that if one was looking to build forward positions this would have been possible too.
Prices are down by $6-8 on cows and with the moderately higher dollar, this converts to about €5 on cows, a little less for heifers and only fractional changes for bulls and other higher quality hides. The thunderstorm we passed through has caused only limited damage so far.
The kill: The kill is down, particularly for males. The rapidly and seasonally falling hide weights are weighing on calculations. This trend will persist for the coming weeks or even months.
What we expect: The first storm is behind us and the damage can be sorted out. With the good volume of sales, many are thinking that the hurricane season is over. In particular, butchers and some sellers are looking to quickly return to the comfort of a long-term bull market. We think a temporary bottom has definitely be found, but that this might be far too early.
The Chinese government could hold some more surprises for the industry. So far we have only corrected the extra cost and discount of split prices. If leather demand is not going to be as strong as the next season starts and cash issues continue to dominate we could see a break, but not the bottom. For the moment, however, it is fair to say that the panic and drama has settled down.
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