Macroeconomics

In contrast to the previous reporting periods, the world economic outlook slid back into its old pessimistic ways during the period under review (August 26 to September 6 2002).  Continuing their 'one step forward, two step back' development, the stock arkets once again took a tumble while the approach of the first anniversary of September 11 did little to help investor confidence. Added to this was the increasing level of sabre rattling directed toward Iraq and corresponding increase seen in oil prices.

Selected data from the big economies again provided too much encouragement to be taken as a reliable indicator - a good case in point being the closely watched US Purchasing Manager's index. This registered 50.5 for August - conveniently just above the critical level of 50. In a similar vein, retail sales in the USA rose 1% month-on-month during July though justified optimism was expressed in relation to the rise in European automobiles sale in the US - and evidenced by the good business currently being done by the car upholstery tanners.

Growth rates and retail sales in the central Euro Zone were again poor with the depressed state of the Germany economy being a major factor. Japan reported strong GNP growth of 1.9 % for the second quarter, but then it also had to drastically scale back its first quarter figure from + 5.7 % to a disappointing - 0.1 %. So things were too good to be true here, after all.

Most other Asian economies appeared back on track showing strong gains in terms of both GNP growth and industrial output. The situation in South America and in particular Argentina showed no such progress as soaring inflation levels and plummeting industrial production figures continued unabated. Much more encouraging - and very possibly one of the factors explaining the current buoyant state of the leather pipeline - was the year-on-year 8.7 % increase seen in Russian retail sales during July. The currency markets meanwhile remained within narrow trading ranges with no significant changes being discernible.

Market Intelligence - the leather supply pipeline

As regular readers will be aware, we were hoping for a clearer picture with the re-emergence of the European leather industry returned from the holiday season. However, this has yet take shape. Hardly anyone is giving clear information, opinions or directions and the market situation remains pretty much the same as it was before the holidays, as do the main market drivers However, industrial and volume leather production - and in particular the Asian shoe leather manufacturing and global automotive sectors - continued to enjoy full order books as many producers maintained their regular buying patterns to cover production. Nappa garments went dormant again after the short flurry of business seen at the beginning of August while the European tanners remained in the seasonal September doldrums, brought on by traditionally low levels of consumer interest and the trend-setting trade shows not yet having taken place. As per usual, many kept themselves busy by getting their existing order books straight and by trying to get in as much customer feedback as they could, in time for the placement of their large seasonal orders.

Consequently, most of the sales force in Europe is now on the road or in the air to collect news and orders in preparation for the winter production season. This year, many of these salespeople have also been told to prepare their clients for the higher leather prices that will come into effect in the new season, to compensate for the increased raw material costs of the first half of the year. They are also 'preparing the ground' for later price increases.

Regulations

Though anecdotal evidence suggests that this approach has been partially successful in Asia, in Europe the market has been far less receptive. Indeed, many of the tanners (in particular shoe leather tanners) we have spoken to say that - apart from insufficient and less than expected orders and colour instructions - requests for higher leather prices have been met with requests for price reductions and/or competitors stepping in with the same product at lower prices. This excludes the high-end market where a large proportion of export business is done with the global premium brands.

It only goes to confirm the ongoing misery of the average European tanner. Poor consumer demand in Central Europe continues to weight heavily on the average price manufacturer, since they now have to fight in a shrinking market against low cost imports from Asia. Moreover, with the market being so price conscious as it is at present, little room for manoeuvre is now left for those suppliers who do not fit into the restricted price point framework dictated by the market dominating retailers. This applies not only to the price of the product, but also to the distribution channels.

Against this backdrop, we now have no choice but to accept the logical outcome. That notwithstanding a sudden turnaround in consumer sentiment in Europe, further tanners and manufacturers will go to the wall. This situation is likely to be exacerbated by the new credit rating regulations (Basel II), which will be applied by 2004 at the latest. Particularly vulnerable are undercapitalised, low profit, medium-sized,family owned concerns that are typical of the European tanning and leather goods manufacturing sector. So the outlook in this part of the world is far from bright. We also have to accept from the past week that the raw material market is becoming less and less subject to events taking place in isolated markets or general economic conditions. The process of globalisation is already well advanced in our trade.

Equilibrium

Returning to the hard facts of the raw material markets, we can now look back on prices that have remained within a very narrow band. The majority of the markets remained steady and in many cases even remained slightly firm. We have also passed the low production (holiday) season in Europe and the low season of the year.

Current price levels reflect that during the market conditions of the summer, the supply and demand situation was fairly well balanced. The same applies to most of the other markets, though splits and double face lambs continue in short supply while nappa skins are still not finding enough takers to be fully absorbed by the market.

The remaining question is still: 'Will the trade continue to enjoy the state of price equilibrium set up in the summer or will the final four months of the year hold some nasty surprises?'

Balance

It is too early to say yet which way things will go, as too many important factors now hang in the balance, both on an industry and macroeconomic level. These include:

1. When will Iraq be attacked?
2. How will the US and global consumer marketplace react?
3. Will September 11 2002 be marked by further terrorist atrocities?
4. Will the price of oil keep climbing?
5. Will the German elections finally shake voters out of their apathy and
    could this finally signal an improvement in the economy in EURO land?
6. Will current raw material and leather prices and the trade's attempts to
    hike those prices result in more designers experimenting with other
    materials?
7. Will those designers in any case switch to other materials, so that raw
    materials that are currently seen as being under utilised are used more
    frequently?
8. Are the growth rates in Asia and Eastern bloc sustainable and if so,
    will they lead to even tighter raw material supplies?

Though none of these questions can be answered today, the picture should become progressively clearer in the coming weeks as important political (and military) decisions are taken and the leather industry's mood is gauged at trade shows around the world (please see leatherbiz event calendar).

At least one thing is certain. Assuming normal market conditions,  there is a strong indication that products made from leather will continue to sell in at least steady  mbers and that raw material supplies will not increase. The effect of these concurrent (and conflicting) trends on prices in the short term is obvious.

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