German Perspective - 06.08.16

06/09/2016

What happened this week: The long-awaited All China Leather Exhibition in Shanghai is over and the biggest question is if it has given us the information and insight about the situation in the leather business that everybody was waiting and looking for. It was pretty obvious that the show is getting smaller, with fewer exhibitors, empty spaces and definitely fewer visitors. However, it was neither boring nor had anyone really to kill time to pass the three days of the show. There was enough to talk about and the people attending and visiting seem to have had a clear idea of what they wanted to talk about and do.

If we draw the bottom line, we would say that business in China is actually determined by several strong influences. Rising production cost, government focus on pollution issues, financial restrictions and the excessive production capacity. If one summarise this, it is becoming a very strong argument for a major restructuring of the industry in China. Under the present conditions production capacity has to shrink. For the reasons which have already been discussed, demand for cheap leather products has significantly faded and this means that mass production in China has been hit hard, considering falling material prices and rising production costs.

Although there was general agreement about the situation, the conclusions drawn were different. Some believe the entire tanning industry in China will have to reduce production capacity, while others are pointing to the fact that several of the big players in the industry are currently running expansion programmes. Conclusion: small tanneries will close and disappear while the mega operations are growing and the net effect is not going to show a big difference in production. There is no doubt that the big ones are trying to get even bigger, but this is also creating new problems. Flexibility, production management and raw material supply are becoming a pretty large headache. Tanneries beyond a certain size always become a problem in the history of leather production.Time will tell.

When one looks at the actual business during the show, demand was very much focused on better-quality raw material. One had the impression that tanners expect or already have in place a reasonable amount of orders for finished leather of higher quality and heavy substance, upholstery leathers, for example. So, the interest we received was specifically for medium- and high-end hides suitable for upholstery leather production.

Price is a serious issue in China. Good-quality hides have never been a problem to sell and Chinese tanners find it very difficult to understand that they cannot simply refuse to pay what other people are spending for specific raw material. For these types one does not really need to travel to Asia. However, some business was concluded, but prices did not meet the levels we consider to be adequate for this material. The real trouble started when one began to discuss the lower end of the quality range and the type of products one wants to sell into the Chinese market. There was very little interest and if one wanted really to sell very serious discounts had to be given, 10% to 15% below the ‘official’ market prices was the minimum one had to accept if sales were to be made.

Leaving the show it was difficult to decide if one should be happy with the sales made or frustrated about the prices. Only cowhides commanded prices close to the levels we have seen for a while.

The kill: The kill continues to be lower than one would expect at this time of the year. Still low numbers for bulls, and weights continue to be lighter than normal.

What do we expect: We think it will take few days before everybody has finally put everything into a pattern. Prices of the different hide types are drifting too far apart and this is also making the valuation at the abattoir a pretty complicated job. We hope still for some ‘after show’ activity, because so far with the exception of the top end of the range we continue to expect pressure on prices.

	Weight range	Avg. green weight	Salted weight	Avg. weight salted	Price per kg green weight	Trend
Ox/heifers	15/24,5 kg	22,0/23,5 kg	13/22 kg	20/21 kg	€ 2,30	Weak
	25/29,5 kg	27,5/28,5 kg	22/27 kg	25/26 kg	€ 1.80	Weak
Dairy cows	15/24,5 kg	22,5/23,5 kg	13/22 kg	20/21 kg	€ 1.70	Weak
	25/29,5 kg	27,5/28,5 kg	22/27 kg	25/26 kg	€ 1,45	Weakish
	30/+ kg	33,5/35,5 kg	27/+ kg	29/31 kg	€ 1,40	Weakish
Bulls	25/29,5 kg	27,5/28,5 kg	22/ 27 kg	25/26 kg	€ 1,90	Weak
	30/39,5 kg	36,0/37,0 kg	24/34 kg	31/33 kg	€ 1.90	Weakish
	40/+ kg	45,0/48,0 kg	34/+ kg	38/40 kg	€ 1.85	Steady
Thirds	15/+ kg	25,0/27,5 kg	13/+ kg	24/26 kg	€ 1,30	Weakish
Thirds bulls	30/+ kg	38,0/40,0 kg	24/+ kg	33/36 kg	€ 1.30	Steady

German Perspective - 06.08.16 - leatherbiz: Lea

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German Perspective - 06.08.16