German Perspective - 10.6.14
10/06/2014
When it comes to the real business the situation is far more realistic, because it seems that those who want to sell and those who need to buy are in a good balance - with exceptions. The business built on the boom in China (Hebei) is gone, and our concern, which we shared with a handful of others, that this was just a big illusion based on cheap production costs seems to be justified.
It was, in the main, not driven by the exploding leather demand but by the hope that cheaper costs would secure more business, and this has actually inflated raw material demand to fill the drums (the old and the new).
Leather demand did not rise parallel to production. This means if one was able to keep all the 'old clients', who were not willing to follow the prices and shift to cheaper options, you still have a solid customer base.
For those who went with price and shifted too much business into Hebei, the situation is a bit different. The extra business is gone and the old customers are remembering who was there in difficult times and who went to competitors for a few extra dollars.
Most of the established businesses in China are pretty regular, even when clients try to take advantage of the market as they should after the correction.
However, this is not enough to clear up the supply of hides which are still on the side lines and in less regular supply origins and warehouses. This explains why, on the supply side, the opinions are so mixed. Those who managed the recent correction without too much damage and were able to sell and ship regularly are far less concerned while others suffer double in terms of loss on stock and contracts as well as restricted sales and no additional demand for hides on the horizon.
They should be happy that the market is stabilised by the quality suppliers who show little intention (yet) to adjust prices much further at this stage. Most of the business is being done between the stable supply relations and this doesn’t appear much in public.
The European Central Bank lowered interest rates again, which has put more pressure on the value of the euro although this is easing a bit of the pain on margins which have developed from deep red to red or light red for overseas export from a month ago.
It seems that we are approaching the next junction. Into the summer, demand will continue to dry up and, except the top end of the quality range, it will be difficult to eliminate the pressure which is still hanging over the market from many hides which are looking for a home. As the summer holidays in Europe approach, the pressure to take decisions will increase and only a buying bonanza could wipe the problems away.
Business this week was spotty and isolated. A few sales were booked with Asia for limited volumes and at steady or fractionally lower prices. Interest was mainly for dairy cows and ox/heifers and a few low grades. There have been enquiries for males too, but prices remain too high for the majority of tanners.
The kill: There is not much to say about the kill. It is low, the weights too and the next two weeks will be shorted by a holiday in most parts of the country.
What we expect: We remain conservative and cautious. The market should be happy there is no serious panic and neither tanners nor suppliers are interested in sharp or extended movements. With the regular leather production running normally, a base for business is there. However, the price structure of products, origins and articles is not intact and needs further adjustments to close spreads and gaps.
We think these adjustments will be on the downside and we do not think there is any potential for a market rebound in the near future. An additional and controlled downside adjustment over the summer might be the best for the market in the long term.
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