German Perspective - 8.7.14
08/07/2014
In terms of articles, only dairy cows and low grades are attractive. Even ox/heifers are being turned down and we do not need to speak about bulls, which are far out of any consideration.
In Europe one gets the impression that tanners are just waiting for the summer break and vacations. Hides needed until the summer holidays are covered and most are not willing to take positions for the time after. So, this leaves most of the attention on the abattoir where politics dominate and not the market.
With the general slowdown of activity, more and more people are beginning to think about the rest of the year.
July and August will be dominated by the summer break. September to December will determine the annual results of the by-product and tanning industry and it seems that the majority will not be too satisfied with the results of the first six months. In many cases, good results in the first quarter were eroded in the second.
Raw material prices were too high, margins were missing, there was a slowdown in demand, crashing split credits - there was a bit of everything for everyone and it seems only a handful with very specific business were able to escape.
This means that a good number of the supply and tanning industry have to think about changes for the rest of the year to improve matters.
Options are limited on the supply side. The strategy is mainly to sit tight and wait for the customers to return when they see their inventories shrinking.
Fundamentally, the main opinion remains that rising population and income is enough to bet on rising prices for raw materials. Any reduction is only a correction and the trend remains intact if you are patient and in a position to wait.
Price levels have successfully been set in the last year and there is a strong belief that prices for standard articles should not fall when the industry and the consumer has paid them.
The consumer market and the producers however do not need to play this game as long as there are alternatives. One may complain about the lack of flexibility of the industry and the slowness of reaction, but the possibility to shift should at least be considered.
Don’t forget that there was time not long ago in the split market where everyone was convinced that it was a demonstration of how scarce the raw material was and how desperate splits were needed to meet global leather demand. We don’t hear anything of it now.
Sheep and lambskins saw record prices in 2013 and declined sharply in 2014, despite all the noise about reduced ovine production and slaughter. So, many changes are an option and this should not be forgotten.
There is still some time until the end of the summer and it will be interesting to see what the decisions will to be. While tanners are fearing a sharp correction it would be easier to start a new season with workable leather prices to keep the material attractive.
We are curious to learn if the resistance of the beef industry against low material prices will be successful if this leads to a new cycle of reduced leather demand despite the strong performance of some sectors.
Sales this week were not impressive. What the market will still take (low grades and dairy cows) is in good balance and what one would like to sell (light bulls) nobody wants. So, sales remain very selective and there is neither an acceptable balance in the spread of prices nor an acceptable balance in the sales and demand between the articles; generally an indicator that the market is not in proper order. Payments and letters of credit are coming in slower than they should, which is not good news either.
The kill: The kill remains at seasonal levels but has, to our surprise, improved during the last week. The school holidays have started and week after week, more Federal States depart for the holidays with the peak in the last weeks of July and the first week of August. So, we should just stay where we are with the numbers.
What we expect: There is little that could lead to major price changes at this stage. Tanners are unwilling to pay more and sellers unwilling to take less. So far, this has been good enough to keep the levels within tight ranges. We fail to see any reason why this situation should change with both sides not yet forced to change their ideas. The first - if at all - to blink are tanners in Asia while the Europeans have still plenty of time until they have to come back. So, it looks like we can focus on the World Cup finals rather than on business.
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