German Perspective - 06.11.18

06/11/2018

What happened this week: The drama continues. What was on the horizon and might have been expected by anyone willing to analyse the situation rationally, came to pass on Monday of last week. One of the largest international tanning groups, with its roots in Germany, has decided to adjust its production plans to the business realities and has informed suppliers that, until the new year, it will cut soak by 50% to bring European production back into balance with the supply chain.

This was communicated completely transparently. Most likely it was either a coordinated action or a signal to the automotive community that nobody needs to fear any excessive competition for hides and time has come for the required price adjustment for premium heavy hides which has for so long been withstanding the general price trend in the raw material markets. There have already been corrections for various other EU origins.

The trade and the beef industry will wonder if this is just a one-off decision or if it may inspire more companies to take the same action; often it just needs one front-runner for the others to follow. The coming weeks will tell, but considering the hard facts (that automotive leather production has exceeded physical sales of cars to the end user for most of the year and that sales are falling in most regions) it would be no surprise if other tanners were to take similar steps. Some may have done already.

This would cause congestion for a hide type that, for almost a decade, has never been a problem to market because even with a temporary surplus it could easily be stored as salted, wet blue or wet white. It was clear that the material would find a buyer quickly when the short-term imbalance passed, a matter of weeks and nothing more.

Since we are now entering the killing season with higher numbers expected, a cut in leather production would create far bigger problems than just a price adjustment. The hides may not find a taker and would need to be discounted massively to compete and squeeze other hides out of the market.

The situation is new, but one already senses that the key players and suppliers were prepared for this to happen. Too many were of the opinion that the premium hides, those of 40 kilos and more, were untouchable in the market. They may have to reconsider. Once again, it could happen that even lower prices will be unable to stimulate demand; the customer-base is too small to act quickly and it could take until the end of the year for suppliers to open new doors. A few weeks from now we will know.

The biggest problem at the moment is the fact that not many expect any upturn in leather demand to trigger bigger raw material requirement. Once again: we are not seeing the classic price-cycle: we face a demand problem for leather and have done for a while and nobody knows when that is going to end.

Activity from Asia was slow last week and it is becoming more and more of a struggle the get payments and letters of credit handled to make sure shipments leave as scheduled. We have not detected much interest and sales were rather sloppy and piecemeal. The slowing economy in China, the weak currency, the trade war with the US, the uncertainties about tariffs and the winter pollution problems keep buyers and banks sitting tight and hoping for clearer skies soon.

The kill: The kill has settled down. After the sharp jump some weeks ago the numbers are now settling a bit, although they remain close to expected levels for this time of the year. Weights continue to rise, but more moderately now. Actually, we would call the situation normal.

What we expect: We think there is no choice other than to wait now to see how the packers and tanners digest the news. Serious price cuts for males are unavoidable and hopefully the trade will not make the mistake of taking lukewarm decisions. It is more than overdue that harsh, necessary steps be taken and realities accepted to find a base and a new start.

Type	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	€ 2,10	Stable
	25/29,5 kg	27,5/28,5 kg	22/27 kg	25/26 kg	€ 1,00	Stable
Dairy cows	15/24,5 kg	22,5/23,5 kg	13/22 kg	20/21 kg	€ 0,90	Weak
	25/29,5 kg	27,5/28,5 kg	22/27 kg	25/26 kg	€ 0,70	Weakish
	30/+ kg	33,5/35,5 kg	27/+ kg	29/31 kg	€ 0,60	Weakish
Bulls	25/29,5 kg	27,5/28,5 kg	22/ 27 kg	25/26 kg	€ 1,50	Weak
	30/39,5 kg	36,0/37,0 kg	24/34 kg	31/33 kg	€ 1.55	Weakish
	40/+ kg	45,0/48,0 kg	34/+ kg	38/40 kg	€ 1.45	Weakish
Thirds	15/+ kg	25,0/27,5 kg	13/+ kg	24/26 kg	n.a.	n.a.
Thirds bulls	30/+ kg	38,0/40,0 kg	24/+ kg	33/36 kg	€ 0,80	Weakish

German Perspective - 06.11.18 - leatherbiz: Lea

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German Perspective - 06.11.18