Though just a few macroeconomic indicators were released during the period, they overwhelmingly pointed in the same direction – upward. The most telling was the US consumer confidence index. This jumped by around 15 points - the highest single gain for almost two decades.

Adding to the good news was the increase in new home sales in the US and the decision by the leading central banks to leave interest rates unchanged – at least for the time being. Car sales were above expectations in many regions with European and Asian manufacturers experiencing the greatest demand. The trading range between the major world currencies remained intact, though several attempts to test the market and break out of the current trading range were seen. Meanwhile, the Japanese government and central bank again tried to stimulate consumer demand through tax reforms and other anti-deflationary measures.

The only clouds on the horizon were a threatened strike by the German auto workers Unions and the rise in oil prices, which could continue if the recovery of the world economy comes on as strong as many forecast.

The market continued with the same pattern that has been in place for some time. World demand for shoes and automotive leather continued along its upward path while hide supplies for this type of production continued to tighten.

At the beginning of the period a contradicting situation dominated the markets. While the USA steer market took a break, European steer prices rallied impressively. The result was a continuation of the uncertain mood that has prevailed for some time - that bull slaughter in Europe might or might not be able to meet the present demand of the automotive tanners.

Having used up almost all of their reserves during the previous weeks, tanners continued to weigh up their options. Driven by the fear of empty drums, they did their best to make up the numbers required for production while finalising their budgets for the coming weeks and months.

This situation encouraged butchers and processors to raise their prices almost on a daily basis. The climax is now being seen in most abattoir buying operations where butchers have tasted blood and are attempting to overprice their coming months’ production. The hope is that the bottlenecks will force their customers to accept their asking prices, however high they might be. As of today, we have yet to learn the final results from the battlefield and it is too early yet to take stock of the casualties. Experience tells us, however, that once one or two have buckled under the pressure from the sellers, it is only a matter of time before the rest of the market gets sucked in.

Many hide suppliers are try now trying to put offer their final decision making until the end of this week when they hope to see how the land lies following Asia Pacific Leather Fair. They are waiting to see if tanners are needy or willing enough to justify the new prices being asked for.

Against the backdrop of the current general concern about the market levels being attained - and with the memories of what happened after the last price surge still fresh in their minds -

not very many producers appear to be willing to overprice themselves, especially when the prices could well become the market norm in a month or so. In the US, where tannery supplies are directly in the hands of the packers, the situation is more straightforward with packers simply trying to obtain the highest price they can during the week.

Most of the market focus in the past few weeks has been on reports from Asia. This is because many suppliers from all over the world use their trips to Hong Kong for wider travels in the region to visit their customers. With the concept of globalisation becoming more prevalent within the leather industry and customer bases expanding rapidly, trips of up to three weeks are becoming more and more commonplace. They are also becoming increasingly necessary for businesses to reinforce their contacts with their Asian customers and to establish new ones.

It would appear to be time well spent. Because the growth potential for the Asian tannery sector is impressive if not frightening. The combination of a rapid recovery in the world economic outlook, the replenishment of US inventories and the continued growth in demand for shoes and cars from mainland China has already been behind the steady and continous rise in demand for hides we have seen in the the recent months.

Indeed, the retail activity we have looked for in recent editions of Market Intelligence but were unable find was in fact taking place in China and Asia. This was because most economic indicators are focused on the larger western economies and Japan. As sporadic as they are, most reports from China now speak of good leather furniture business to be had and demand is expected to rise further. Other Asian economies are also beginning to show higher levels of consumer spending than forecast.

In addition to internal growth, Asia has also benefitted from the process of inventory replenishment now taking place in the supply pipeline as the world economy begins to recover from the terrible events of September 11. The continuing gravitation of footwear production to the region from South America is also obviously favouring the Asian tanners.

In a wider context, China is fully confident of meeting its car production targets with sales for the next few years forecast at around 5,000,000 units. This leaves tanners very optimistic about their potential to become OEMs (Original Equipment Manufacturers) serving the automotive sector directly and their abilities to participate in the after sales market as well. As a result, a large number of investment plans centred on the auto segment are now being put in motion by tanners. Levels of confidence are being bolstered by the fact that other Asian countries are also expecting to post good car sales throughout the remainder of 2002. Growth in furniture sales is likewise highly rated with positive expectations for an increase in sales of leather upholstery.

Many of the garment (skin) tanners, which are now the only ones suffering from poor business due to a warm winter in both domestic and export markets, are planning to switch to upholstery leather production over the next 12 months. By comparison, shoe and leathergoods business is expected to remain steady to better. Where this segment is concerned, however, production facilities seem to be adequate and further relocation rather than a net expansion can be expected.

Taking all the above into consideration, one can now better understand why we have seen such an active market in the last few months. They also explain why buying has been so active prior to Hong Kong. Understandably, many tanners wanted to avoid an eventual outbreak of the market, which as everyone knows can easily happen in such an market environment. Having already got their buying out of the way, most delegates are looking forward to a relaxed Hong Kong. The pressure to sell and to justify the trip is significantly reduced for many and late arriving buyers who have decided to meet their suppliers at the show can expect strong positions.

Having summarised all the good news items that were driving the prices of mainly male hides, we should make mention of the persistent problems currently being experienced in the garment sector - as well the price competiton in the furniture leather business.

Despite all the positive expectations, so far nothing tangible has transpired and for many the hope that things will take a turn for the better during this season are starting to fade. The warm winter appears to have left higher inventories in the supply pipeline in the Western world, while the Russian and domestic Chinese business is simply too volatile for large producers to base their budgets around. However, there is now not much time left for orders to come in. Just how poor levels of business are is evidenced by the fact that dairy cows have hardly reacted to the general enthusiasm in hide prices.

Not that the positive outlook for the furniture leather business has had any significant effect on hide prices - the only exception being the heavier and higher quality end in Europe. Here, history teaches us again that regardless of what is happening in the wider world, the price for volume productions in corrected grain types always stays within narrow price bands.

The brighter global economic outlook has not converted into higher leather prices and tanners are complaining heavily about price competition. The main culprits are the Chinese tanneries and furniture makers who are in most cases expanding into integrated manufacturing – all of them looking to improve on the lower margins inherent in being involved in just one step of the production process.

Leaving the exciting part of the world for the moment, let us now take a quick look at what is happening in Europe.

Here, it would be fair to say that tanners are shocked by what is happening in the marketplace. Despite some seasonal improvement in leather orders for shoe production and perennial demand from the automotive sector, it would be fair to say most are having a difficult time. Even those who are nominally the most successful are not exempt from current problems as many have insufficient raw materials to cover their order books. As a consequence, these businesses are now are looking at a loss-making situation. Those without sufficient orders meanwhile are also frequently finding that they lack the market information to make adequate calculations. Furniture leather orders are reported to be coming in slower and the seasonal decline in demand can be expected shortly. So the European outlook is not particularly positive.

Turning our attentions to the footwear tanning sector, which is extremely focused and centred on a few producers who operate mainly in the high quality segment, we can see things are a little brighter. Here, there is a steady demand for heavier and higher quality calfskins that are beginning to become as scarce as the heavy bulls used by automotive tanners. The fact remains however that the business is not broad based and the main tanning centres in Europe are not showing the levels of activity they should be for the time of the year. It is to be hoped that the Bologna Show in a month’s time will provide the impetus for a more optimistic outlook.

Let us now take a quick look at some other raw materials before going on to give a forecast for the near future.

Split business continues to improve if one just looks at the simple volume. But as we all know, matters are seldom that straightforward. Price resistance is enormous and the European lime split producers are having major problems disposing of their ‘production waste’. In addition, there are the problems associated with the dependence of higher splitting substances on the reduced soaking of cows. Although the market is capable of absorbing specific types of splits quckly from stocks, these cannot or will not be replaced for the time being. Prices have only gained moderately and conditions remain in reasonable shape.

Skin business is a bit mixed. While higher quality hairsheep remains in decent demand and prices are high, the average and lower end continues to struggle. Nappa skins still trade at relatively low levels and are unlikely to move much due to the relatively poor garment market. The good quality double face business is looking for New Season lambs with only a few offers being seen so far. But with strong underlying demand for high quality light weight skins, it can be expected that prices will start the season at the higher end of the scale.

Let’s now try to think about the market’s future. Not so much into next week but more into the medium term. Regular readers of Market Intelligence will know we are careful to avoid being swept up in the excitement of a single day’s trading and that longer term cycles provide a much more meaningful indicator of what is likely to happen in the future.

With this in mind, we would draw our readers’ attention to the following factors:

• The market is extremely supply driven. Kills in the major countries are well below normal and the market would look different in times of normal slaughter. Kills are now expected to increase in the main production areas.

• Everyone is focussing only on restricted segments of the market, i.e those that are currently successful.

• Oil prices are rising and political tensions in the Middle East are ratcheting up.

• Interest rates can be expected to rise latest by mid year at the latest.

• Tanners’ calculations are becoming less predictable and leather still has critical price levels. Substitution is also becoming common in many products.

• Europe is still waiting for an improvement in retail sales. But this is unlikely to benefit leather products until the second and third quarters. Other market may now suffer from seasonal declines.

• Many hide prices are rapidly approaching critical levels.

In looking to the future, it is instructive to go back to editions of Market Intelligence from September/October last year when we had a similar set of circumstances, but with exactly the opposite signs. It was the time when everyone predicted the market would fall and only very few were accepting the ever-prevailing cycle of the raw material prices and demand. At that time, many still believed in a long lasting cheap raw material supply. How quickly times change.

Those tanners who claim they are now faced with a seemingly insurmountable supply situation are advised again to further investigate the raw material alternatives. Many things can be achieved when necessary and they will get their supplies and prices back under control only if they refrain from accepting offers. Sometimes, it can be cheaper not to use the desired items and face some production losses further down the line, rather than throwing the money away at the outset – though we realise this is easier said than done in the real world.

So, we dare to say we are now approaching the exaggeration phase of the market, though there is likely to be the inevitable time lag before the market realise this. Last year, it was almost three months before people caught up with the reality of the market situation. Despite the good news from Asia we should always be mindful of the volatility of the market and that the mood and reality of the market – though related – are two different things.

For the time being, the short term seller remain in the pilots’s seat, though they will need to exercise caution if it is not to become an ejector seat!

We close with a well-known quote of a speech made by Alan Greenspan some while ago. Though he was obviously not speaking about the hide market, the parallels are clearly there:

"We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions."