The past two weeks were again very exciting as far as the general financial world was concerned.

The stock markets showed no inclination to settle down and even managed a rally towards the end of last week. But the stock market figures were by no means the whole story.

US growth rates fell well short of expectations and the data for 2001 had to be downwardly revised. GDP for the second quarter of 2002 rose slightly (by 1.1%), but this was only half the rate anticipated while at 0.3%, the US growth rate for 2001 was barely a quarter of that forecast.

Western world manufacturing remained in the doldrums, with the closely-watched US ISM index shrinking from 56.2 in June to only 50.5 in July. Germany’s unemployed again exceeded the 4 million mark while Japan’s industrial output was found to have shrunk 2.9 % in the first half of the year. However, other Asian industrial outputs rose in the first quarter; Thailand by 6.2 %, South Korea by 5.4 % and Singapore by 18.9 %. The US$ gained strength against the Euro, again confirming our previous outlooks and confounding the ‘expert’s’ forecasts of a further straight fall.

The South American financial crisis meanwhile rolled ever onward as the IMF bailed Brazil and Uruguay out of their immediate financial problems. Whether this will be enough to stabilise the whole region in the longer term remains to be seen, but in the meantime the weak currencies are at least helping to boost the competitiveness of export businesses.

Market activity remained subdued due to the holiday season with our European correspondents reporting an almost standstill situation and the hide people operating with minimum staff to keep production and essential administration ticking over.

Most of the other markets reported business as usual. Little variation was seen in prices world wide with the exception of a late rally in the USA. Here, another round of buying from Asia combined with an increase in trader activity to boost the confidence of the packers. Particular encouragement was provided by the stability seen in the levels of demand and the validity of the packers’ forward positions. However, prices remained locked into the same trading range that has been in place for some time. They are now on the high side slightly – a situation that could well result in price break out before too long.

In Europe, markets are still in holiday mode and price changes here were unrelated to those seen in North America. A rise in demand from the Orient was noted and it would be reasonable to assume that with the level of selling seen in the past weeks, the quantities currently available are likely to have been sold. The fact that these quantities are also being shipped as soon as they are sold means we could see a decent flow being established by the end of the summer.

We did not see significant sign of movement in other markets. There were rumours of interest in better quality hides from South America, both to beef-up selections and take advantage of the low costs inherent in the devaluation of the Latin American currencies. With the rapid expansion of leather production in this region, hides are no longer available cheaply nor are they in oversupply.

Consequently many tanners in the region are finding themselves in the position of having to look further afield for their supplies – as evidenced by US figures for hide exports to the region. The rise in Latin American hide consumption is also in line with the shift in manufacturing from the old world to the emerging markets, as described in the introduction to this report.

It would be all too easy to ascribe this to lower costs, but is more to it than that. Lower production costs may well have set the ball rolling, but as the process of globalisation has gathered pace, so other advantages have emerged. Fewer environmental constraints, an inexpensive and ready supply of labour, customer relocation to the low cost regions, lower taxes, government subsidies, an abundance of local raw materials, fast expanding local consumer markets – you name it, all of these are now driving the trend toward big businesses ‘going global.’ Another factor is the limited growth potential offered by the ‘traditional’ markets of the developed world.

With regard to the leather trade, the speed with which the process of vertical integration is taking place, combined last year’s epidemics, means the biggest tanners are now much less willing to tie themselves to a single country of supply. This is especially the case in Europe where EU decisions on agriculture and consumer protection are making the market situation increasingly unpredictable.

Those who are not directly involved in the process of the integration might not be aware of how quickly the largest leather-consuming manufacturing organisations are becoming larger. Regular visitors to the leatherbiz.com news section will already be aware of the pace of growth being set by the Singaporean furniture manufacturer, HTL. However, this is just one of several similar organisations, all of which can be presumed to be expanding at the same frenetic pace.

The car upholstery producers as well companies such as Natuzzi, Ecco and the like all decided to embark on expansion plans of their own some time ago, causing the tanneries to follow suit. Today, the outcome of this can be seen in the fast-expanding presence of the US tanners in the Far East, and the Europeans in South America and Eastern Europe.

All of this would be fine if the supply of raw material was expanding at the same pace. But it isn’t. The upshot is that after some delay, the situation that was predicted in the mid 1980s for the 1990s – where rising demand for leather coincides with falling raw material supplies – is now a reality, as it has been for some years.

Assuming supplies hold steady and that the volatility of the raw materials market continues to diminish at current rates, then further growth can be expected in these giants. As long as supplies remain sufficient, they can be expected to grow using their financial clout and at the expense of their smaller counterparts.

Issues of globalisation aside, these large organisations are also more attractive to their raw materials supplier, who obviously value the larger orders the simplified procedures that dealing with a large organisation entails. Relationships of this kind also lend themselves to more coherent marketing and distribution strategies – strategies which in turn drive costs down further for both the producer and the supplier. They also offer better planning and higher levels of security – so long as the growth strategy of the end customers remains intact. The laws of supply and demand are just as applicable to a market where there are fewer but larger players than one where there is much more fragmentation. As such, this new industry structure is just as susceptible to the peaks and troughs in demand as any other consumer-dependent market. It should also not be forgotten that the more an organisation grows, the less agile it becomes.

                                       Problems

With regard to specific parts of the business, we think that demand for splits will hold steady while demand for sheep and lambskins will grow. If this comes to pass, then we are likely to see a marked increase in market pressure since we are currently also seeing a decline in supply (ref: leatherbiz.com UK and Ireland Perspective). Indeed if the normal seasonal upswing in demand for skins out of Turkey, Poland, Korea and China is currently taking place, then we can expect supplies will almost certainly be outstripped. This in turn could trigger another round of severe problems like those seen in the past, where manufacturers failed to factor in the higher raw material prices. On the demand side, we will also have to watch the new customs regulations from Russia. These could weigh heavily on the small volume cross border trade, which is so important to the supply of the Russian market.

The coming weeks will remain again entirely focused on the activity from the Orient. If present levels of demand remain in place, then there is a good chance trading will break out of the current range on the upside and that the European tanners will be in for a surprise when they return from their holidays.

Having said this, we should not forget that under the present retail climate and with the current economic outlook in the Western world, the consumer market is unlikely to be receptive to further price increases. Not that consumer prices have ever impacted on the raw material market anyway.. For the coming months, in Europe and the Eastern bloc the kill will intensify, while in the rest of the world we are likely to see a decline.

So presently, the argument points toward a firmer raw material market in the coming weeks. To see how the market shapes up beyond that, however, we will have to wait until the leather world gets back into full swing in September.