German Perspective - 28.10.14
28/10/2014
The extent depends on origins and suppliers, but nobody can escape. Most of the international reports are published in the US and they are not only global market guides but also the benchmark for the markets in general, and for leather price negotiations in particular.
For everyone outside the US they have been - besides the currency - the best shelter ever had. We have discussed the market a number of times during the summer and said why we are convinced that a price correction is necessary, but the high price levels in the US gave the suppliers from other origins the chance to sell and prevent large unsold inventories before the killing season began.
Now, with the situation beginning to deteriorate we can see the price erosion and are better prepared than we would have been if we were hit in September, which was a serious option. We have to be aware that we bought time and those who used it sensibly have possibly done well.
It is difficult to find strong arguments for a market rebound in the near future. We have to be realistic. We are at the end of October and this is traditionally a very busy time in the industry. Production and procurement are normally at very high levels. One has to be recognise that leather demand is down from a year ago and we are of the opinion that this is a direct consequence of the overshooting prices for raw material and leather in the 2013/2014 season. Leather as a material has become increasingly less attractive and by the end of October we have to accept that the orders arriving to the tanneries are less than expected and fewer than a year ago.
This may touch the sectors differently and is reflecting differently in the raw material markets, but the spreads between hide types and different raw materials which have been created will have to close eventually, because they are not justified.
In the meantime, the hides which are mainly used for commodity leathers are facing the strongest headwinds of prices. Cows are said to be facing the biggest resistance although we have to say that this does not apply to us. This might be related to the fact that in a firm market the price is more a factor and concessions on quality and consistency are made - even when this could mean a surprise on weight and quality. Generally, one can feel more concern about the market trend and although not openly quoted, raw material prices have started their descent. There might be still a few islands in the sun, but in general one hears about sales at lower prices for many types and origins.
Leather orders are not meeting expectations and tanners are just buying hand to mouth and not taking any longer commitments. This is highly unusual for this time of the year.
Trading was again pretty light this week. The majority of the bids were pretty ambitious and up to $5 below asking price. This can only be attractive for those who either have to liquidate stocks or are expecting a further and sharper correction of prices. We were just picking around the edges and took the best around which was about $1-2 below the market, but volumes were small. Being reasonably well cleared, we think it might be better to see if the slaughterhouses are also taking the change into account for the prices for November.
The kill: Little change. The kills is high and with the weather now getting more seasonal it seems the numbers will stay high.
What we expect: It is difficult to find an argument why the general pressure on prices should disappear. Supply is adequate, but activity and confidence in the tanneries are well below the normal seasonal levels. This seems to convert into the long-expected weaker trend for raw material prices and the question is now which material, when and by how much. For the moment it is not clear where we are in this development.
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