During the period in review, (October 16 – November 1) the financial markets contained much less excitement than in the previous weeks as stocks rebounded from their previous lows and settled into a stable trading range. The financial data with the greatest impact was the US consumer confidence index which last week fell to nine-year low of 79.1 points, reinforcing concerns about the stability of consumer spending in the USA.

U.S. manufacturing meanwhile contracted for a second straight month in October, keeping alive concerns that the U.S. economy has stalled. The data were the latest in a series to underline the weakness of the US economy, cementing bets in the financial markets that the Federal Reserve, faced with a stumbling recovery and almost no jobs growth, will cut interest rates by at least a quarter percentage point this coming week.

The closely-monitored Institute for Supply Management index of manufacturing business conditions also fell one point in October to 48.5, as opposed to the 48.9 figure forecast. Either way, it was under the 50 mark, denoting contraction in a sector that makes up less than one-fifth of the economy.

So presently two opinions hold sway the future of the US economy. While the optimists continue to believe in the American consumer and their willingness to support industry by continuously spending more money (than they make), the pessimists hold the view that the bubble fuelled by current rash of low or zero interest finance deals is not far from bursting.. Although we admire the American’s optimism and their trust in a better future, we reluctantly tend to the latter view.

The currency market also held few surprises. Against the backdrop of the more pessimistic outlook for the American economy, the euro was able to gain slightly while the Yen remained reasonably weak against the dollar. Most experts now believe further falls in interest rates in the US and Europe are inevitable, and are increasing using the ‘d’ word (deflationary) to describe the developing situation.

In common with the wider macroeconomic picture, the past two weeks were not very exciting at all. The pressure on raw material prices persisted although little evidence of this was to be found in the official price lists. Our expectation that the trading range for raw material would be very narrow and the price direction remain generally downward therefore came in exactly right.

Against this backdrop, more than ever before we hold to the view that the officially published price lists are higher and in some cases significantly higher than the prices actually realised. Having said this, we have seen some very reasonable business so that the sales of raw materials accumulated are still relatively good, protecting the market from any steep fall.

Although it is extremely difficult to take account of the effect of the US West Coast port dispute, one thing is clear: a smooth round trip of raw materials and finished consumer products to the USA is presently out of the question and is likely to remain so for the foreseeable future. Rumours of an extra port congestion charge have been circulating and the delay in shipments will likely impact not just individual companies, but on the wider US economy and those of the Pacific Rim. If they become reality, the rumoured extra charges will also reduce the margins in the pipeline and this applies to the leather industry, as the packers are unlikely to absorb the increased cost involved.

It is in our view very surprising that apart from Nike, so far almost nobody has advised that the shipping problems could be a threat to their business. Either manufacturers in Asia or importers and retailers in the USA are lacking orders or expectations for sales. Either way, the official export sales and export shipments figures don’t appear to stack up with the experience of the shipping companies – the official figures being close to normal.

Figures released last week also show that the US automotive producers are continuing to have a tough time, with GM suffering a 32% fall in sales in September, year on year.

The attempt to get away from 0% financing has battered sales and one can see how quick the customer is getting used to market conditions and takes them for granted. We have touched on this subject at various times in Market Intelligence and it would appear that the massive incentives aimed at keeping the production lines moving could now be turning against the industry, burdening its margins massively. It will be very difficult to convince the consumer to accept normal terms and prices again.

Having surveyed the influence of logistics on the trade and the general situation in the USA, let’s now take a brief look at the Asian markets. Here, surprisingly, we find things not going at all well. Speaking regularly to our Chinese correspondents, we can see that business has slowed significantly in the past four to six weeks, with a particular fall-off being seen in tanning activity and buying interest and no improvement being seen in the short term.

A factor could be the upsurge of interest of the customs authorities and tax offices in recent months. We hear that various tanneries, importers and agents are presently being investigated and various people have been convicted or are now in custody pending further investigation. Knowing the Chinese trade, one can assume that this might scare quite a number of the members of the leather pipeline and it cannot have a positive impact on the situation for the moment. The Asian outlook is somewhat better outside China where there would appear to be no shortage of orders, but otherwise there is nothing new to report. As has been the case for some time, the fierce competition in retail worldwide is continuing to exert strong downward price pressure in the pipeline, to the extent that we are now risking a deflationary situation.

The same trend was reflected in the limited news we were able to obtain from the US furniture fair in Highpoint, North Carolina, the consensus being that while demand for leather and leather furniture remains reasonable, it can only be obtained by reducing price levels. Indeed, the leather prices mentioned were ridiculously low and as far as we are concerned, are unlikely be reflected in the raw material prices. This of course presents a big risk. It suggests that tanners with low order books are accepting these prices in the hope that raw material prices will fall in line. However, it is entirely feasible that raw materials prices will remain firm on the back of improving leather demand. This was the situation that prevailed in 1999 when prices were much lower, though statistically-speaking there is some latitude for raw material prices to be reduced.

At least in Europe, despite all its structural problems, we were able to speak to quite a number of tanneries and leather manufacturers who were generally positive in their outlook. People in the leather pipeline are not known for their enthusiasm or casting their business results in a positive light, so when well known members speak about ‘acceptable business conditions’ one can assume that things must be quite alright! This applies certainly to the upper end of the quality range and to those businesses that have linked up well in the pipeline – a subject we have already dealt with in previous editions. Consequently, overall hide sales are healthy, with top quality items finding no shortage of takers.

For instance, the 2% decline in prices seen at the Zurich hide auction last week was more the result of market sympathy rather than a problem of sales. The increasing demand for cheaper leathers supported the interest for lower grade and quality hides. This meant previously neglected origins such as Russia and low grade hides from western Europe found much more interest in the market and sold very well.

As we had forecast, hides that were neither good enough to play in the premium league nor cheap enough to be of interest to the low price market fell on stony middle ground. Here, UK and Ireland-sourced medium-quality hides and continental cows came under particular pressure (For the latest UK and Ireland slaughter figures, go to the separate section shown on the home page of leatherbiz.com).

In this market, there was the additional factor of timing, as the trade over there is reported on a weekly basis. Because of this, abattoirs prices are able to adjust much faster than in the other markets where prices are in the main reported on a monthly or two monthly-basis. So in falling to low levels, hides from the UK and Ireland could be said to be ahead of the rest of the market.

Interesting news came also from France (see leatherbiz.com news headlines) where one of the industry’s leading names ran into trouble as a result of questionable management procedures and given Chapter 11 bankruptcy protection from its creditors. This has hit the French steer market especially hard and it is to be expected that the market will come under severe price pressure in the short term in until the surplus is found new homes. Certainly, they are likely to suffer a significant drop from the highs being reached just a few short weeks ago.

The split market continued to be under-supplied and quite firm. Prices continued to rise but one cannot help but wonder how they fit into the scheme of things when compared with equivalent low price hides – particularly where coated splits are concerned. One can think of hides that cost same or even less than the equivalent split. Sooner or later, either cheap hide origins will have to increase or split prices fall for the market to balance itself..

Lamb and sheep skins recovered a bit from their previous misery. Though cheaper skins suitable for nappa production already enjoyed decent demand, we heard of slightly improving conditions for doubleface lambs. It would appear that the arriving winter has encouraged some tanners – mainly those in Türkiye - to return to the market and to buy further raw material. However, prices slipped by a margin 5-7 % before tanners were attracted again.

So what do we expect for the coming weeks?

Most will depend now on the outcome general mood of the Bologna fair this week. Not only does the event bring tanners, shoe manufacturers, raw material people and fashion designers together, the parallel event of Tanning Tech is also acts as a rallying point for the technicians of the leather world.

What used to be a European or Italian event has developed to become probably the world’s most important leather fair. Apart from fashion pointers, the platform for the exchange of information it provides means we should have a much better idea about the immediate future of the leather business in a week’s time. The event is where one can gain an accurate feel for where the industry is headed, both in terms of business and issues of style and fashion.

In many areas, mainly in leather goods and shoes, leather prices in the past 6 months have had the effect of shifting a lot of commercial interest to non-leather materials. The prices of average- quality hide and leather have risen too far for them not to create the classical reaction in the minds of designers and retailers. ‘If we can’t afford the price then we will have to refrain from the product’ appears to be the buyers’ philosophy – particularly with regard to side leathers. To counter this, what the market needs is a situation we have seen several times before, where the design flair of Italian tanners and their increased willingness to use cheaper raw materials engages the interest of those buyers looking for cheaper products. We sincerely hope that Bologna confirms this vision.

Generally speaking, however, we don’t yet see prices correcting en-masse just yet. European hides in general look pretty attractive after their recent declines while American hides - at least according to their official price levels - are reasonably expensive. High quality hides are in general very expensive but also still in relatively good demand. Low quality hides meanwhile are increasing in their attractiveness all the time while average-quality hides could reasonably be expected to bottom out soon.

Taking all this into account, we would not be surprised to see cheaper European origins reaching their lowest level in the next four weeks while all the others have a very high chance of staying with in the present price bands, with still more potential to ease rather than to rise. In any case in the next MI, we feel enough will have become known for us to gain a clearer perspective of the coming year.