Introduction

Again over the last two weeks the general economic situation was neither terribly exciting nor did it have any significant influence on our market. Most of the world’s attention has been focussed on the summit that took place in New York where there was a marked difference between the positive statements from politicians on the future of the world economy and the more cautious ones made by European bankers, economists and company chiefs.

This polarisation of opinions reflects the fact that fewer people now share the positive view from the US on the economic future, and behind the scenes there are a number of concerns over problems such as the US trade deficit and the continuing devaluation of the Japanese yen. The fear is that these factors might eventually have severe impacts on the stability of the world economy. Another devaluation of the yen could create a domino effect on other currencies in Asia (even in China?). At present the markets are sustained by US optimism as well the hope that the potential economic recovery in that country will allay all possible concerns.

Despite the talk, not too much has happened except a slight decline in the stock markets following the summit, and all the major currencies have remained stable, relatively speaking.

Market Intelligence

In the leather pipeline, the period covered by this report was reasonably active and eventful. Most of what we anticipated in the previous MI held true with the exception of some speculative tension, predominantly in Europe. To some extent this has disturbed the market equilibrium and resulted in rising prices for special items over the last week.

Good quality hides and heavy female hides suitable for quality furniture leathers (mainly from Europe) advanced well over the past two weeks. This was due to short-term demand from tanners (mostly Italian but also elsewhere) that supply the high quality end of the market. The reason for this was a sharp improvement in leather and leather furniture orders from the US combined with a strong dollar, giving European manufacturers the courage to increase raw material purchases even at rising prices. Faced with the risk of missing the boat and not securing the desired raw materials, buyers seemed to have lost their patience quicker than expected.

Non-European raw material markets – as far we are able to monitor – were less affected. Their limited capacity to meet such immediate demand either in terms of quality or delivery meant that they were unable to benefit from the trend and so most of these price levels remained within narrow trading ranges. But to be fair this also applied to the hides and skins in Europe which do not fit into the favoured categories mentioned above.

The lambskin market was exceptionally strong for high quality material suitable for double face production due to firm Russian demand for superior quality for the next winter season. The movement might also have been a consequence of the significantly better clearance of stocks this year. The outlook for a good nappa season has also led to some speculative buying as average quality nappa skins are still available at reasonable levels.

The split market also continued to show better demand, despite the fact that further price advances were isolated. As a lower-priced item, splits quickly hit their limit and with soakings further normalising the supply side might soon start to ease. In Europe producers still appear to be having a nightmare in selling gelatine by-products. This is not only a problem of weak demand; there are also bureaucratic and administrative issues that are causing obstacles.

So far so good: The early results directly correspond with the developments we have been seeing for some time, also confirming the impressions gained from recent exhibitions. The trends seen in these shows are now being reflected in the raw material markets.

But, as usual, not everything is perfect - yet. We still sense a lot of resistance and difficulty in the shoe upper markets. Orders in Europe have not yet arrived in the volume and at the prices tanners need and the tanning and production centres in Italy and Spain are still suffering. These firms are forced to continue in the hope that the situation will improve by the end of the month for next season. However, this issue could be even more important than it appears on the surface and there needs to be a sharp improvement to avoid serious problems in this industry.

The question that must be raised is whether this is the final shift of production to other markets or if the footwear sector is just in a slump. Looking at the fashion and retail figures there is definitely no general decline in demand and things should therefore get better over the next few months.

The same still applies for the bovine garment tanners. We are not sensing any improvement in orders - and consequently in business – yet, and so patience is required until the normal seasonal production begins in Asia in order to get a proper feel for the situation.

Some concerns are also arising now in the vegetable tanning sector. After a good run at the beginning of the year due to reasonable orders for belts and replenishment activity of sole leather tanners, things have quietened down significantly. Many tanners in this sector are complaining about insufficient selling opportunities for shoulders and bellies.

One shock was the announcement by Freudenberg, one of Germany’s most famous tanners, that production would cease by the end of September this year because of poor profitability (see leatherbiz.com:"Freudenberg ends association with leather" February 4, 2002). It is sad news, not only because of the long history the company has, but also because of the fact that one of the world’s most prestigious calfskin leather tanners has chosen to discontinue production in such an apparently good position. The company had developed a leading position in the market but folded precisely when raw material conditions were becoming more favourable. Whatever the story behind the story, the result is another big name to join the list that have left the leather industry over the past two years - further confirmation, perhaps, of the changing structure of the sector.

BSE again

In Europe, the BSE problem has suddenly moved back into the public gaze. In Germany unlicensed private testing labs have been found issuing negative certificates for unclear test results while in Italy the first human case of CJD has been discovered, which might be related to the consumption of beef infected with BSE. Both incidents might not only knock consumer confidence in beef but also have implications on exports. German producers are particularly nervous with 90% of their exports going to Russia.

While the BSE situation could very quickly have an impact on supply, there has already been the effect of the predicted reduction in the kill-rate for steers and bulls this year. One should not forget that in 2001 in continental Europe there was an overproportional number of males slaughtered which has not yet been replenished. The result is a reduction in the kill this year in an attempt to return to normal levels. Meanwhile, reports from other countries do not seem to offer the potential for any increase in supply in the short term.

Price rises

So what are the conclusions for the weeks to come? Looking back at what has been written, the past two weeks have seen a certain amount of extremes. There is strong demand for specific leather products and it seems that this may last for some time still as we are still right in the middle of the season. This is coupled with little hope for any improvement of supply, leading us to one conclusion - a further rise in hide prices.

This is one of the scenarios for the coming period, and we have made it clear in the past that we do not follow the belief in everlasting pessimism and falling prices. At the same time we have been, and are, of the opinion that the present rise in some European prices can not and should not be described as a shift in the total price trend. Those items substantially rising in real (currency corrected) terms do not represent the majority of leather production. A real trend can only be confirmed if the volume manufacturers in Asia also show better demand and this will be seen in the weeks to come. If this is the case we are entering into a new cycle. Thus far we have isolated fluctuations, fashions and price adjustments of undervalued raw materials.