Leather Pipeline: 30.10.19
30/10/2019
We continue to see tensions between governments and citizens; demonstrations have taken place in Hong Kong, Chile, Ecuador, Spain and Lebanon over recent weeks. In many countries, the gap between the leaders and the people is widening.
The number of unstable regions continues to increase. In the past two weeks, Turkish troops invaded Northern Syria and was just one of many. It it is not nice to see that more and more people are living in insecure environments.
US President Donald Trump is under increasing pressure, and the Brexit rumbles on. The twists and turns did not seem to worry the UK public - maybe because they are so used to it.
The financial markets remained unimpressed, perhaps because of the endless flow of cheap money into the markets. The global economy is expected to lose speed and growth forecasts has been reduced to just 3% by the International Monetary Fund. China’s growth forecast of 6% is also well below what is considered sufficient for the country. The official statistics in China might be even be masking some of the economic problems.
The European Central Bank has appointed Christine Lagarde as president, taking over from Mario Draghi. It seems policy will be unaffected, which will make finance ministers happy, because they can prop up their national budgets with almost no interest to pay. Saving is not a good idea and for the small investor switching to property and stocks could also be a risk.
The experiment of flooding the markets with an endless flow of liquidity has never been tested before and it is still one of the biggest economic risks ever seen.
Oil prices and precious metals continued to trade within narrow ranges. The currency markets have also been static. This year could be one of the years with the lowest volatility in the markets.
Market Intelligence
The leather pipeline has entered the livelier end of production, with holidays in China and the West around the corner. Tanneries are focusing on production rather than speculating about demand.
African Swine Fever continues to expand in Asia. The decline of pork supply has triggered a substantial increase in demand for beef. This is reflected in the sharply rising of slaughter in the Americas and Australia. Packers are enjoying good margins on beef, which allows them to be more tolerant towards the declining revenues for the by-products. This particularly applies to the hides.
In one of our previous issues we mentioned that every market returns to balance eventually. It took a while, but this seems now slowly to be materialising for certain parts of the raw material supply chain. Nobody knows how many stocks are sitting around the globe for low-grade material, but many suppliers, from butchers to traders, have realised that the demand for their product will be insufficient to guarantee a clearance of production. Consequently, new ways have been found and they range from landfill to destruction, or use in the collagen markets. The outlook for this section continues to be grim and it is unlikely that a short-term return of leather demand will clear the raw material produced.
The situation for more valuable hides and skins is different. Here - at least in our opinion - balance might already be in sight.
It is not an even picture. In the cattle hides section, the US suppliers have been the first to adjust their prices to the levels needed to regain market share. For many weeks, US export sales have reached reasonably sufficient levels, which just leaves the question of whether there are still larger stocks hanging around.
It is interesting that the suppliers did not answer better sales with higher prices. It seems they learned the lesson from mistakes made so often during the bear market. Quite the reverse; suppliers are carefully managing their pricing so as not to lose market share to other origins. For the time being, the US has returned to a balance between supply and demand, despite the high kill this year.
Some of the shine has been felt in other regions. We understand that Australian suppliers have become the second choice for the Asian leather industry and aggressive pricing has made hides so attractive that the buyers couldn’t resist. A similar pattern has been seen in South Africa.
In South America, a lot of negative factors are at play. These countries do not seem to be able to benefit in terms of price. We guess this reflects the range they have to offer as well as obstacles around free trade.
This takes us to Europe. Perhaps because we are close to the region and networking is more intense, but it seems the situation here is less uniform. We are still hearing about large stocks sitting around the continent. This could be due to company policy, where management were unwilling to adjust prices and preferred instead to store hides. In other cases, in particular in the eastern and south-eastern parts, there was simply no demand. Many of the hides produced in these regions failed sell for a long time.
It is also not just a question of quality, because even high-quality veal skins did not have an easy summer at the price levels they were at. This was despite the record sales in the luxury markets. The high street brands continue to perform well, but the high-end labels were not willing to pay the premium for the best raw material. They were looking for margin and some took the chance to switch to cheaper materials.
As a result, the market for veal skins did not find a balance between the prices from the premium market and the potential customers. We don’t think this problem has been solved and it might still take some time until there is a compromise between prices and volumes. It is not easy to reach a conclusion, because there is no question that the high street brands can afford the premium raw material. The profits continue to be impressive.
For regular hides from Europe, the situation is far from uniform. There is demand from Asia for cow hides and heifers. Quality is good and prices for males are attractive. However, the spread between females and males is larger than it ever has been. This has been a headache for many suppliers in Europe. For the premium chilled top-quality males, prices were set in Europe which were no way near what the Asians were willing to pay.
This is not a surprise, comparing the average price from Europe with the ones from the US over the past year or so. The surplus which usually moves at a certain price overseas could not be placed in Europe and was not attractive anywhere else. This problem has not been solved. At the same time, other female hides were very competitive and with prices stabilising in the US, buyers in Asia have been shifting their interest to Europe recently.
As usual they are cherry picking and so they are buying from the top of their preferred supplier list. However, demand has become solid and the clearance of stocks has become significantly better since mid-October and it seems that by the end of November this market could also be back in balance.
The big question remains where all the hides that might be a little bit aged are going to go, and what will happen when they will arrive. Some of them might not have been properly stored. We will find out in two to three months.
In the meantime, buyers and sellers are matching well. Sellers would love to have their production shipped and the Asian tanneries are looking to get their hides by the first week of January. Chinese New Year is early next year (January 25) and many are not willing to enter the holiday period with too much inventory in their warehouses.
All in all, we are still in the middle of a structural problem in the leather pipeline. However, fashion is still demanding leather. The drama surrounding beef consumption and leather in Europe is not representative of the rest of the world. This allows a reasonable proportion of the hides and skins produced to enter a drum.
The split market is flat, although lime splits are being sold. There is stable demand from the gelatine market in China. The split market for the leather industry remains good for specialities and challenging for the standard material.
The ovine market is the same. Producers clean up commodity skins and are selling them below processing cost just to avoid the cost of destruction or landfill. There are a lot of skins being sold at price levels around $1-2 per piece delivered but this can never be enough to cover the cost of collection, preservation and shipping. For the more prestigious skins the market is not bad. Skins with a special performance might not achieve big tickets, but they can at least be marketed at their cost and in some cases even with a sufficient return.
We are beginning to see a light at the end of the tunnel. This might be temporary, because we are shortly going to feel the influence of the holiday periods. However, we believe that slowly but surely the reshuffle in the market is beginning to have a certain result which may not make everybody happy, but the almost complete stalemate and pessimism seems to be fading. By mid-November should know more.
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