The David Peters column: Frozen
03/03/2015
We have plenty to cheer about including the Chinese Spring Festival, Greece, the West Coast port labour agreement and of course the Oscars. Recently China celebrated their great ritual, the annual Spring Festival and the year of the “Goat”. Little time or energy was devoted to the hide market. With the continued problems with the west coast ports, reduced shoe orders and challenging price levels, most buyers sat back and watched the dragon dances, feasted on dumplings, enjoyed fireworks and just kidded around.
Action in the hide markets was sporadic at best and prices trended steady to slightly lower. After all, even if shoe tanners had the business there would be no guarantee when the hides would leave the west coast, so purchasing was more about hedging and less about covering actual leather orders.
There used to be a tradition in this business that after making a booking with the steamship line and having the containers picked up at the source, the hides would find their way to the docks, be placed on a boat and sail off to Asia. The recipient tanner, eager to utilise fine US hides, would reimburse the seller and all would be cool. So what’s happened to this orderly flow of goods as currently these fine US hides are sitting in containers, somewhere between the Midwest and the Pacific Ocean, and going nowhere? This slow-down is due to ongoing contract negotiations, since last May, with the core issue centring on choice of arbitrator. Great, my containers are being held in limbo because one side did not like the call made by the umpire and wants a new one. Give me a break! Let’s institute instant replay. The World Cup in soccer should have had a different ending, just ask the Brazilians, but don’t blame the referee. So in the middle of the night when we were all dreaming about the Oscar gowns and Lady Gaga’s incongruous impersonation of Fraulein Maria from The Sound of Music, an agreement was reached.
Most business models favour backlogs as this guarantees production and translates into profits. The west coast ports’ resumption of operations will take, conservatively, three months to reach normalcy. The current 31 ships waiting off the coast of Los Angeles and Long Beach will provide sufficient work, and overtime and premium pay will be paid by all. Speaking of cost, now that oil prices have reached early 2004 levels and the dollar is stronger than a butt-branded steer, we can expect plenty of adjustments in fuel surcharges, terminal handling fees, currency adjustment factor, bunker adjustment factor, and so on. Also let’s not forget that there is an over capacity in the shipping industry and charter rates are at all-time lows.The Baltic Dry Index (BDI), which tracks the cost of transporting dry commodities such as coal, iron ore and grain across 20 shipping routes, dropped to its lowest level since the creation of the index in 1985. This is a call to arms: e-mail, text, write or just plain phone your local representative and ask when freight rates are coming down.
In the meantime the inability to service our key customer base in Asia is having real consequences. Hundreds or possibly even thousands of containers holding hides and wet blue are sitting in the sun, and not improving with age. With each container having a value between $75,000 and $100,000 there is a lot of scratch tied up in the ports and shippers no doubt are becoming tight on greenbacks. Far Eastern tanners will look for alternatives and when the hides finally arrive what will be the condition they receive? None of this is positive news for the hide market.
On the other hand there is better news for the euro, which might translate into a softer dollar, which could potentially help US exports regain lost ground as Greece will be granted a vital four-month extension on its debt repayments. With more than €323 billion in debt (or $370 billion) Greece is obviously too big to fail.
According to the CIA fact sheet, China with a population of 1.4 billion is the most populous country in the world. Today more than 50% are living in or around the major cities, no doubt attracted by better income prospects and supposedly an improved standard of living. The cause and effect of urbanisation is very apparent to members of the leather trade as with each visit to various tanning centres or attending the All China Leather Exhibition in Shanghai each September the landscape of consumerism and industrial development is extensive.
During the 1980s China attracted foreign investment encouraging companies to shift their manufacturing operations with assurances of a cheap, abundant and enthusiastic labour force.
European, Korean, Taiwanese and US leather producers flocked to China in order to support and follow their customers, and more importantly take advantage of cheaper conversion costs, and lower environmental thresholds. These companies together with an emerging group of Chinese firms, created, established, educated, trained and supplied the world with a spectrum of leathergoods. China’s success positioned it to dominate manufacturing in all of the major footwear and apparel consumer markets, to the point that each region that had an historical association with the shoe or leathergoods industry became uncompetitive and consequently reliant on cheaper imports from China.
To support and safeguard overseas investments a plethora of partnership structures was established. These entities functioned to provide a well organised means of outsourcing goods and services bringing economical, quality products back home. In addition it allowed the transfer of equipment and proprietary knowledge with the understanding that manufacturing systems and the resulting products would adhere to the same standards consumers expected from their trusted brands. So far so good.
The transformation to a market-oriented platform resulted in China becoming the world’s largest exporter in 2010. In roughly 20 years the biggest achievement created by these investments was not necessarily cheap products for Wal-Mart but the formation of the world’s largest middle class.
In June 2013 McKinsey & Company published a paper entitled ‘Mapping China’s Middle Class’, stating the following: “The explosive growth of China’s emerging middle class has brought sweeping economic change and social transformation—and it’s not over yet. Along with affluent and ultra-wealthy consumers, upper-middle-class ones are stimulating rapid growth in luxury-goods consumption, which has surged at rates of 16% to 20% per annum for the past four years. By 2015, barring unforeseen events, more than one-third of the money spent around the world on high-end bags, shoes, watches, jewellery, and ready-to-wear clothing will come from Chinese consumers in the domestic market or outside the mainland. The magnitude of China’s middle-class growth is transforming the nation.”
Back in the US, the high street or shopping mall was not only the main driver for the US economy but also provided early warning signs for the hide market. Leather industry enthusiasts could just wander the streets or mall corridors to see first-hand the current shoe style, handbag or general use of leather. This hands-on approach provided many in the hide business with current info on what was in vogue, understanding that this was a lagging indicator and not necessarily a measure of things to come. Today, while the influence and conditions in the US economy have not changed, it no longer provides a true indicator compared to yesteryear.
China’s transition to a strong domestic market, based on the establishment of a growing middle class has moved the means by which leather sales and therefore the hide market can be influenced. This is not a reinvention of the wheel but an acceptance that consumer demand in China today has a greater influence and impact on future hide prices compared to the historic US retail scene.
Hides that were previously purchased for shoe brands focused on the US and EU markets are now being utilised more for Chinese domestic sales and less for export. Decisions relating to style, comfort and purpose are being driven by the burgeoning domestic market there and not by overseas sources. Supporting this contention is the growth in Chinese brands and the adjustment of investment domestically. Millward Brown and WPP have released the annual BrandZ Top 100 Most Valuable Chinese Brands report. They describe a rebalancing agenda whereby Chinese companies are growing demand for local brand names and also raising brand profile in overseas markets.
With the shoe business being the single biggest driver in the hide market, utilising more than 55% of global hide production, a shift or change on the demand side does not speak well for maintaining current hide prices. The globalisation of the hide business, enhanced by the proliferation of the smart phone, is a key factor in exasperating our ability to comprehend the US market’s impulses. Traditions relating to customs and conventions are worth keeping, but the traditional supply chain of information required to anticipate the next market move has clearly changed.
Meanwhile back at the farm, the USDA’s January reports on production and inventory made interesting reading. Not because commercial red meat production for the United States totalled 4.09 billion pounds (around 1.8 billion kilos), down 4% versus January 2014: not because January 2015 contained one less production day; not because beef production, at 1.96 billion pounds (890 million kilos), was 8% below the previous year, and, finally, not because the total amount of cattle slaughter at 2.42 million head was down 10% from January 2014. The key statistic was that the average live weight was up 24 pounds from the previous year, at 1,358 pounds (617.2 kilos). This, boys and girls, does not bode well for hide numbers in the future as it continues to support the contention that we will not need to aggressively expand cattle numbers to increase beef supply. Fact, since 1978 the average beef yield has increased by 31% and hide production has declined by 18% or 7 million head. If there are any producers reading this, don’t get too excited: we need the shoe leather business to improve. Be happy if we get a dead-cat bounce.
Inventory reports were equally disappointing as placements in feedlots during January totalled 1.79 million, 11% below 2014. Marketings of fed cattle during January totalled 1.63 million, 9% below 2014. January marketings are the lowest since the series began in 1996.
While shoe buyers are dragging their feet, the auto sector remains in overdrive. So as Elsa sings in the Disney film Frozen, “Let it go, let it go! Let the storm rage on. The cold never bothered me anyway.”
David Peters
DLP Advisors
Dlpeters99@gmail.com
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