After the relative calm of the previous two weeks, the world economy reverted to its old turbulent ways during the period under review (September 8-20) as the stock markets took a tumble and international uncertainty surrounding Iraq intensified.  The fear of higher oil prices, the deteriorating situation in Israel and the doubts expressed from some quarters that the recovery in US, Japanese and Western European economies might not arrive so quickly after all also weighed heavily on people's minds.

In the USA, the August retail sales figures showed an increase of 0.8 %.  Shops also restocked during the month while retailers reduced their inventories by 0.4 %.  All good news. However, this was more than offset by the 1.4 point fall seen in the consumer confidence index to 86.2 points.

Other figures confirmed the continuing progress being made by the Asian economies excluding Japan. During the second quarter of 2002, for example, Thailand grew its GNP by 5.1 %, putting the country on track for full year growth of 4.5%. Concerns about China’s economic performance were dispelled as the country posted 7.8 % growth for the first half and surging exports. 

In fact, China’s total exports in the seven months to August were up by a phenomenal 25% on the year before while industrial production rose by 12.7%, adding impetus to a trend that was already in place before the country’s accession to the World Trade Organisation.  The figures also served to reflect the continuing shift in industrial production from Europe and the USA to Asia.  The situation was neatly summed up by headlines in Friday’s (September 20) Asian edition of the Wall Street Journal - headlines that incidentally could easily have been written in relation to the leather pipeline.  One read;  ‘US shopping spree aids global economies but in danger at home; Absorbing world’s excess capacity bloats huge American trade deficit.’ The story that followed highlighted the degree to which the world economy has come to rely on the US retail market.

Another headlined ‘US home sales fuel furniture import boom’ related how the US has increased its furniture imports by 71 % since 1999 and how imports accounted for between 40% and 50% of all US furniture sales in the second quarter of 2002. One can safely assume that China accounted for the largest percentage of this growth. 

The currency markets meanwhile continued to trade in the narrow band established in the wake of correction in the value of the US$ in the second quarter.  The German elections - highly relevant to the future of the wider European economy – failed to result in clear majorities, leaving many to fear that the necessary reforms which need to be implemented might be delayed again.

Market Intelligence

 Most interest in the trade was again focused on Asia and the as many people now travel extensively in the Orient, detailed information was not in short supply - even if the Shanghai leather fair did end on a mixed note.

At the very least, the fair underlined the pace at which the Chinese market is expanding, which was even stronger than many had expected.  China is not only grabbing production from the US and Europe but also from its Asian neighbours. Asian economies are slowly but surely losing ground to China with only Vietnam seemingly attracting investment in shoe factories and shoe leather production.

One could not help but be impressed by the positivity of Chinese tanners at the show. Despite the present margin problem and worries surrounding Iraq they were in extremely optimistic with many talking about implementing new techniques such as integrated manufacturing.  They were fully aware of their production cost advantage and smart enough to implement tight management controls to increase productivity. In addition to the Chinese leather sector’s strong export potential we must never forget that it also benefits from a large and fast expanding home market.

Successful

Having established themselves as successful producers of shoe leather, shoes, garment and tanned leather, Chinese producers are now concentrating on the furniture and car upholstery business. Though progress has undoubtedly been made in relation to furniture, their investment in automotive leather production would seem harder to justify as it is highly dependent on how fast the domestic automotive sector expands.

Being the final step of many business trips, the Shanghai fair also confirmed that the margin problems that have affected other parts of the world have finally reached the Orient, with a number of American suppliers of finished leather expressing disappointment that the hike seen in hide prices in past weeks had wiped out their margins in Asia. 

However, some European hide suppliers enjoyed some buying due to their more attractive price.  Sales in lower grade materials were also noted. Despite their positive expectations and undoubted need for raw material, many Chinese tanners would appear not to have bought significant volumes from their traditional suppliers from the US and Australia, many of whom returned home with reasonable unsold quantities.

Even with full order books and not over-generous inventories, it would appear that many Chinese tanners feel it is worth risking a temporary undersupply situation, if it enables them to avoid the price rises inherent in them being predictable, and buying from their traditional suppliers.  Many were also undoubtedly holding out until they could see which way the Iraq situation was going.

Replenishment

The situation in Europe was entirely different, with most tanning businesses still suffering a dearth of orders and even more from insufficient profitability.  The Italian furniture tanners have yet to get back into full swing after their summer holidays and the shoe tanners are complaining about the present state of the market market. As usual, the only bright spots were the automotive tanners and those producing heavy vegetable products. Niche producers of all kind also continued to do well, even if their contribution to the total is small.

Many will undoubtedly be looking to market predictors provided by the GDS shoe fair in Düsseldorf – the first figures from which are yet to become available. First reports speak of much more colourful designs and if these are well received by retail orientated retailers and consumers, they could well result in a lot of replenishment business.

Let’s now take our customary tour of the other raw material segments, stopping first at the garment business which remains in the doldrums.  Double face from Türkiye slowed significantly as tanners and manufacturers alike waited for further signs of life from their main market of Russia.  Korean and Chinese bovine garment tanners meanwhile are continued to complain of slow business, with many doubtful of any upturn before the season ends in November.   Things looked slightly brighter for the sheepskin nappa producers as not only is fashion supporting their product, but raw material prices are much more attractive.

Demand

High quality calf and veal skins likewise enjoyed buoyant demand as production increasingly gravitates toward India and China.   Splits also experienced good demand – a consequence of the relatively high price of hides. In some categories, the market was significantly undersupplied and many tanners are now screaming for shipments to meet their customer commitments.

So much for the present. With regard to the future, the situation is not that much clearer than in August but at least we are in a position to outline some scenarios as decisions must be taken and the last quarter of the calendar year is traditionally a very important one.

Regular readers will know that because of the unsettled state of the wider world, we have been guarded in our outlook for some time. And though we are not market forecasters we nevertheless like to assist our readers with arguments and scenarios for their own decisions.

So let’s now summarise be the main influencing factors in the market for the coming months.

Without doubt, the most important factor will be the political decisions taken with regard to Iraq.  Though a war and resultant rise in oil prices might not in themselves hurt the world economy, its effects on the US consumer buying behaviour most certainly could. Because if they are at home watching events unfold on CNN, consumers are inevitably going to spend less time in the shopping malls.

Growth

At the very least, it unlikely that American consumers will continue to ignore the reality of the economic situation and maintain their present levels of spending. Many Americans are more concerned about the state of the economy than their media and politicians are willing to admit.

Despite conflicting opinions, the rise in the US’s budget deficit and current account deficit is also likely to spell problems, especially for those exporting from Asia.  Given its high levels of unemployment – and with one or two exceptions - Europe is unlikely to see the green shoots of economic recovery in the short term, while in Japan the outlook remains far from stable.

So, as far as the demand side of the business is concerned, it is likely we will continue to remain reliant on Asia, Eastern Europe and Russia as the main engines for growth and the main compensators for the downturn in the rest of the world.

In terms of the supply side of the industry, the outlook is not particularly good. While in the US seasonal declines in slaughter will occur, in the Southern hemisphere the business will be subject to lower temperatures - something which the seasonal increase in Europe will not compensate for.

If a war with Iraq is averted, or kept short and not followed by wider instability in the Middle East, this reduced supply will keep raw material prices firm, since at present levels business in general is sufficient to absorb the hides produced.

Reactive

However we believe the market which has been exceptionably steady throughout the year and moderately rising will likely become much more volatile in the coming months. Even though the business is much less reactive to external events than it once was, the repercussions of events taking place in the outside world will be impossible to avoid.  Military operations, currency decisions, margin problems and the changes inherent in the continuing shift in production Eastward – all of these will have a much more powerful effect on the business than internal factors and decisions taken within the industry

For the coming weeks therefore,  we would not be surprised to see the overpriced markets fall back, for the demand for high quality hides to remain steady, and for low price selections to increase their attractiveness. Trading ranges will in all cases remain narrow. Beyond that, the unsettled nature of the world today makes things much less predictable.  One thing is for certain.  It will all be highly dependent on decisions taken in the White House.

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