The last two weeks were very exciting as far the general financial markets were concerned. The international stock market embarked on roller-coaster ride that as of today (Friday, July 26) was on the up again. Despite the share situation, the optimists made some ground in the US today, helping to push the consumer sentiment index up to 88 points, though in Europe the mood was more downcast.  This was reflected by the German Business Climate Index, which was expected to hit 91 points, but could only manage 89.

On a wider front, the US$/Euro exchange rate which had been in the focus of interest for some weeks appeared to find a temporary foothold while predictions of a further decline in the American currency were proved premature. Less widely reported was the massive 7.8% jump seen in China's Gross National Product in the first six months of 2002 - a statistic that clearly reaffirms the healthy economic state of the world's most populous country. At the same time, Chinese consumer prices fell 0.8 %, indicating that production is sufficient to supply the huge domestic demand. On a world scale, China would appear to offer more than sufficient compensation for the continuing slump in consumer demand in Europe.

We envisage that in the coming weeks, currencies will remain a critical issue and would recommend keeping an eye on government debts in Europe before getting overexcited about the Euro. We would also be less than surprised if further tales of corporate greed were to emerge, not just in the US but also in Europe. Aside from the insecurities in the financial markets, we remain concerned at what the financial ramifications will be of more unrest in the Middle East and also continued talk of military action against Iraq.

The past two weeks turned out to be much more exciting than expected. Supported by the weak US$ and steady demand from Asia, American suppliers were able to sell larger volumes into both Europe and Asia, bringing the previously referred-to price correction phase in the US to a close. In Europe business activity in general slowed further but some exporters did report increased interest from the Orient - particularly with regard to female hides. Consequently, some were led to say that the substantial price pressure that had previously dominated the market had eased.

Meanwhile the price gap between US and European hides was further narrowed by rising prices in the USA and European sellers selling below their official price list. So with the present trading levels, we would consider that the required level of price adjustment between the US and Europe is now complete.

What is surprising is the resilience of price gap between high quality and standard items and lower quality hides. Under normal circumstances tanneries suffering from price restrictions or insufficient margins would try to ease their problems by buying cheaper raw materials. However, there has been no sign of this as both Brazilian suppliers and CIS hides report continued low levels of business as price levels remained under pressure .

                                       Bargains

This can only be partly explained by the holiday season in Europe, as Europe is only one destination for this type of raw materials. The declining prices for these origins also do not fit well into the generally positive picture of hide demand.

Our expectation of more Asian interest for dairy cows seems also have been borne out. While the Italians - another classical buyer of this product - were active in the prior weeks covering needs for September, Asian buyers were largely dormant and it appears the Asians were expecting bargains due to the holiday season in Europe.

Many of the traditional cow buyers in Korea and China had been absent from the market for about 6-8 weeks. Though some claim this was due to insufficient orders of finished products, more than likely it was the result of the typical seasonal decline of production in the second quarter and probably some speculation that the inventory replenishment could be possible at lower price levels in June/July.

This might have been even possible but in this case the weak US$ was the variable that wasn’t foreseen. European suppliers had to lift their asking levels in US$ rapidly to compensate for the declining export revenues, thereby providing the American producers the possibility to hold or even increase their price levels. As a result, cows have settled approximately 10 % higher in US$ terms than what one was expecting 2-3 months ago.

Staying with cows, we feel duty bound to draw our readers' attention to the two controversial opinions that currently hold sway in relation to the future of this product. On the one hand there are those who expect further interest for dairy cows from the Orient due to the upcoming production season, as well as low inventories. Indeed, with relatively small shipments leaving for Asia in the past months, it is hard to imagine that tanneries are well stocked, even in spite of the low order situation. We might remind our readers that we predicted some months ago that a larger number of new leather furniture producers would start their activity in July/August and it appears these new players still do not have adequate supplies.

On the other hand, there are those in the trade who expect substantially larger kills of cows and heifers from September onwards. While climatic conditions are a factor in the US, in other countries the traditional seasonal increase of slaughter takes place in the last quarter.

We are not willing to take a final position in this argument yet, but we would not be surprised if both the supply and demand for cows were to increase simultaneously and that against the backdrop of relatively steady exchange rates, prices will not change substantially from the present levels. Short term demand, however, would likely find inadequate supplies, thereby creating a decent midsummer rally.

Let's now have our traditional look into the other market segments.

The lamb and sheep skin business was also dramatically affected by the decline of the US$. The important market of Turkey found itself in massive problems because raw materials in many cases are bought in Euros and £STG while finished products in big volumes are sold to Russia and the USA on US$ basis. This coincided with the country becoming enmired in a political crisis. In the recent days, slightly more interest centred around lambskins was observed. Regardless of the course of events, tanners will have to decide in the coming weeks about their raw material policy for the coming season.

In the split market we sense stable interest for splits suitable for leather production and it seems that most producers of splits are very well sold forward. By contrast, the market for collagen by-products in Europe seems to be a real mess and many confirm that inventories are building up with the main producers and consumers of this material being either very well stocked or on holiday. It will need a sharp increase in demand for this kind of material from September to absorb the existing inventories, never mind production from September onwards.

So what can we expect from the coming two weeks? Europe will be more or less idle with those tanneries that started their holidays early not really being back on stream and the late ones shutting down. This means the market will be highly dependent on overseas interest, for which read Asia.

Everything points at present to prices being held in a narrow trading range. Attempts to push prices up further will likely only result in tanneries stepping out of the market while reductions should be viewed as a buying opportunity. We also remain surprised that the problems of the financial markets have still not yet affected the American consumer. All prospects are positive for further decent consumer business in Asia and so with a relatively low stock position in the pipeline in this part of the world, an abrupt fall in raw material prices cannot be expected. Against this background, we would expect price variations to be minimal over the next weeks. Though as always, political events as well as the financial markets have the potential to confound all our expectations.