The unreported markets of China and Russia may hold key to market recovery
Macroeconomics
With the holiday season now upon us, Market Intelligence will be correspondingly shorter for a while. Summer has arrived in the Northern Hemisphere and with the hectic first half of the year now behind us, many will be looking forward to the break.
The background economic news of the past two weeks was again anything but promising.
Germany's industrial production fell against expectations and its jobless figures increased, dashing hopes for an early recovery in Euroland's largest economy. Expectations of an increase in Japanese consumer spending were similarly quashed with the news that retail sales fell by 2.2% in May. Stock markets remained volatile while the weakness that characterised the western world economy in the first half of the year continued unabated.
The biggest surprise was the drop in the US consumer confidence index to the mid 80's on Friday (July 12) - a development that does not augur well for consumer spending in the second half of the year. Regardless of how things develop, the figures emphasised the need for the trade to keep a watchful eye on news and indices. Today’s equalling of the €/US$ might reasonably be expected to pave the way to a further devalaution of the dollar. If this occurs, the competitiveness of European manufacturing in export markets will be further eroded.
Market Intelligence
Due to the holiday season market activity was significantly reduced. Not only were we missing enough trading to draw meaningful conclusions, there was also insufficient input from other parts in the leather pipeline. As a consequence, this review will be significantly shorter than normal.
As far as business and trading was concerned, most of the activity in Europe was centred around fulfilling immediate needs in the run up to the holidays or organising supplies for the start up afterwards. This was nicely reflected in the large volumes purchased by Italian tanners and confirmation of the classic market model where shipments arrive in time for production in September and beyond.
Prices worldwide did not move by too much. The US market bottomed out after its descent over the past weeks. In Europe, prices were held steady because of the exceptionally low kill. The other main supplying regions did not alter their prices significantly but in general it can be said that prices were more on the weaker side reflecting the limited optimism for the short term.
Instability
In those markets where we superficially monitor prices there was little in the way of change. In terms of sheep skins, we heard of steady demand for double-face production while nappa skins remained under pressure - at least in Europe. Trading was light and certainly not helped by the devaluation of the Turkish Lira, brought on by political instability in the country.
There was also little activity to be seen in the split market. This was in spite of relatively strong demand, prompted by atempts to fill short tem production gaps, as well as restricted supplies. It would appear that the downward pressure on prices in the consumer marketplace was simply too strong for anyone to take serious advantage of the situation.
Meanwhile in Europe we heard again about anticipated problems with the disposal of collagen products, where production is currently outstripping demand from the processors.
Strength
It is not the time of the year where the crystal ball is of great assistance in predicting market trends. The only thing we can be certain about is the air of pessimism currently pervading the general outlook in the western world economies. The long expected upturn of the economies in Europe, Japan and USA has yet to arrive and attempts by the politicians and economists to talk up the situation appears to be landing on deaf ears.
Nevertheless - and as we mentioned in previous issues - one should always be mindful of those economies for which accurate statistics are not available, namely China, Russia and Eastern Europe. Speak to anyone who is familiar with these economies and they will tell you that disposable income is steadily rising and consumers are showing no hesitation in spending it. Indeed, it would not be a surprise if this demand were to offset the eventual declines seen in the traditional market economies. However, it also raises serious questions as what will happen to the raw material market when the other economies finally get back to strength.
Correction
For the coming weeks it is hard to see any significant change in the present situation. We still favour the opinion that the current phase of price correction is not yet over, meaning there is still some way to go before European hides get back into a fair valuation. With the Northern Hemisphere being in the holiday mood, hardly any movement can be expected from this part of the world, meaning that Asia will be the main driving force. Indeed, it could turn out to be an interesting summer because inventories will not be sufficient for all tanneries. With not too many hides in the pipeline, a fresh round of buying could catch both sellers and producers unawares. We doubt this will happen in the coming weeks, however, and in any case consider the financial markets a much more influential factor. Nevertheless, it leaves us with something to speculate on for the remainder of the holiday season.
