Most of the general economic data released during the period was positive. Major indices in the USA and Europe were up and Tokyo’s anti-deflation programme received a warm welcome in the international money markets. Major world stock market indices rose with gains of more than 10 % being recorded across the board. Given the strong relationship that exists between stock market figures and consumer sentiment, it is reasonable to assume that the world economic outlook will continue to improve – barring any unforeseen circumstances.

Mr Greenspan’s ‘beige book’ outlook for the US economy was also generally upbeat, though he was careful not to let his optimism become too infectious for fear of people forgetting just how parlous the current US economic situation really is. In a similar vein, the European Central Bank elected to leave its interest rates well alone, arguing that the current low risk of inflation and the strong potential for further improvement in the European economy made it safe to do so. In the few last days, the currency markets appear to have reacted in line with the recovery of the Yen in relation to the US$. However, it is too early to say yet whether this will become a trend or is simply the effect of the seasonal repatriation of money into Japan. Either way, the euro was able to recover in sympathy.

The last fortnight has indeed been most confusing. Despite the fact that the general price trend was extremely firm, for some reason the mood of the trade remained somewhat sceptical. The market remained entirely supply driven. Low kill levels in the USA as well as in South America and Europe prompted many suppliers to increase their asking levels and the predominantly Asian (Korean) buyers to accept the same.

The main driving forces in the market also continued unchanged, with the automotive tanners continuing to encounter problems in securing supplies and the higher quality furniture tanners enjoying good levels of demand at decent prices - mainly from the US. Giving the market a major push was the decision by a leading footwear manufacturer to abandon its South American supply lines and shift to Korea. The effect was to force the Koreans into the raw material market while making it easy for sellers to have their rising asking levels met. As ever when discussing physical shifts in production of this kind, it should be borne in mind that this was not new business but merely business relocated from one part of the world to another.

Another noteworthy development was the general increase in complaints concerning shipment and payment delays. It would appear that improved levels of business have a long way to go before they reach all parts of the leather trade – with the mainly European side-leather and Asian garment tanners looking as though they are going to be the last in line to benefit. At the same time, various sources have reported that the current prices reached for hides appear to have given some Chinese tanners second thoughts as to whether or not they wish to follow the market.

The Zurich hide market on March 9 confirmed the firm trend for quality hides with double-digit percentage increases being recorded. How representative this is for the total market is questionable however as 80% of the total numbers offered went to one buyer only while the regular customer base chose to stay out of the price levels paid.

Price spreads between various sources remain extremely wide and the gap has yet to show any signs of narrowing. Other raw material markets such as sheep and splits did not see any major changes with business remaining relatively steady and sales staying on the right side of acceptable. But they were nowhere near buoyant enough to justify major significant price increases.

So what can we learn from the first eight weeks of the current year - and what do they signal for the future?

In posing these questions, we would draw our readers’ attention to the Market Intelligence of the end of 2001 when we warned tanners against dreaming of endless supplies of cheap raw materials. The fact that the world leather business is to a large extent dependent on supply means the tanners of this world are always to an going to be hostage to events taking place further up the supply chain. Limiting their options further is the fact that the tanning sector is becoming increasingly specialised, which means greater emphasis is being placed on the availability of particular kinds of raw materials.

Analysing the information we have collected so far in 2002, we haven’t found many tanneries operating at 100 % capacity. Taking account of the various levels of success being experienced within different sub-sectors of the industry, we would estimate that the majority of operations are running at 70 to 90 % capacity. And because parts of the raw material market are in such a firm state, we believe there is very little room for further increases in production - unless of course there is a sudden upturn in world slaughter. The only other option would be for tanneries and their customers to finally find ways of optimising their raw materials consumption for their existing and upcoming product ranges.

It would seem that for the time being at least – against the general background of tannery bankruptcies and voluntary shutdowns - the only companies that are putting their plans for expansion into effect are those that are successful (see Leatherbiz news: plant HTL, new plant of the Mastrotto group in Brazil). It is difficult to avoid the conclusion that the next structural erosion of tanning capacity will take place in Europe, knowing that the balance for expansion in China, the eastern Europe and South America will have to be found from somewhere. In the short term, however, we can expect the supply squeeze that has characterised the business in recent times to continue.

But neither do we foresee the everlasting price rises that many are hoping for. If we were to do so, we would be as much out of touch with reality as those who predicted an everlasting supply of raw materials, six months ago. The rules of critical price levels apply just as strongly now as they did in April/May 2001.

Taking account of the massive downward pressure being exerted of producer prices, we believe that it will not be too long before leather for mass-produced items re-enters the critical price zone. Certainly, we do not share the view that last year’s price rises did no lasting harm to the leather trade - or that those tanneries which came through the resultant crisis intact will now be able to absorb the same price levels again.

The fact of the matter is that last year’s events did cause serious damage to many leather businesses. Consequently, the financial resources of many will be more limited this year. We believe that rapid price rises this time around will quickly reach the upper limits of what raw materials buyers are willing – or able - to pay.

Equally, we believe that there will be a greater appreciation of the gulf that exists between the raw material prices paid and those that are quoted. Even now, there is still no reliable indicator of how much of the raw material that was quoted at top prices last year was actually shipped at those prices. It is to be assumed that many of the top-level contracts that were agreed in 2001 were subsequently renegotiated downwards, having been overshadowed by the new and substantially lower prices that followed soon afterwards.

For the coming weeks, it can be expected that the world’s leading suppliers will be doing all they can to ‘talk up’ present price levels – if only to justify their attendance at next month’s APLF in Hong Kong and all those ‘important’ sales visits to Asia! At the very least - against the background of the present raw material supply situation - there can be no realistic expectation for major price declines within the next four to six weeks. For the time being, it would appear that a fair balance has been struck between those tanneries that are adequately supplied and those that will need to restock before too long.

With these events in mind, it does not take any significant foresight to consider two likely scenarios.

• Demand will outpace supply, with the garment and side leather business re-entering the market en-masse. Prices will rise, taking supplies out of the reach of many leather businesses in the second quarter - the logical outcome being downward adjustment in the second half of the year, or:

• Prices set prior to Hong Kong will run out of steam, bringing with it the prospect of a less volatile business environment in the second half of the year.

Whichever way the industry goes, the one thing that should not be forgotten is that – in spite of the superficial price squeeze – reasonable hide supplies are available and shortages currently only applying to particular types of hides and skins.

It takes no great leap of the imagination therefore to realise that the wider the range of hides and skins a tanner is able to use, the better positioned he will be to exploit the dynamics of the market – and keep his raw material prices down.