The currency market again traded within a very narrow range, with no change being seen in the euro/dollar exchange rate, with the value of the currencies remaining roughly equal. The benefits of low interest rates in the USA continued to be negated by the poor state of the European economy and the costs and problems envisaged with the expansion of the EU eastward in 2004.

On the plus side, the stock markets continued to recover from their lows with particular progress being seen on Wall Street. With the notable exceptions of Germany, France, Italy and Japan, national data meanwhile was reasonably positive, fuelling hopes for recovery in 2003.

Growth in the United States rose 4.0 % in the third quarter while the UK and Spanish economies expanded by 3.4 % and 3.2 % respectively. The emerging economies of Asia would appear to be back on track, with 5.6% growth being seen in South Korea. But while the European outlook brightened slightly, it was nevertheless overshadowed by the depressed mood in Germany.

We find it worrying however that most of the growth seen was related to consumer spending and rising real estate prices. Many families are overspent and this could lead to another bubble that will inevitably burst. It should also be remembered that a significant part of the growth in Asia is strongly dependent on the manufacture of consumer goods for Western markets.

Market Intelligence

After the final main event of the year - the Bologna leather fair - business activity slowed. Consquently, the hide and leather pipeline delivered few surprises during the period in review (November 18 – December 2).

Having said that, after the price corrections of the previous weeks, a major rebound was noted in the US steer market. Many in the trade attribute this to short coverings by traders and not significant new business from tanners in export markets. Dairy cows by contrast continued their descent.

Towards the end of the period some Pacific Rim producers reported renewed interest in female hides from Europe, suggesting that prices had finally bottomed out in Europe. Indeed, with the temporary support of the firmer dollar, sellers who got their timing right were able to achieve acceptable returns. Wet blue cows that had been at the forefront of the declines seen UK and Ireland also underwent something of a change in fortune, with unconfirmed sources reporting prices rises of between 5 and 8%.

In Europe, we are facing a fascinating market constellation at the moment. Despite continuing good business, for the first time in a long while male hides entered a state of oversupply. The price pressure this is creating will come as particular relief to the shoe upper and automotive tanners who
were especially badly hit by the price hype surrounding this type of material during the summer.

In a wider context, it begs the question of why such a rapid turnaround should occur in the first place. The short answer is the higher level of kill in heavy bulls seen since beginning of October. Under normal market conditions, this would have been absorbed in the last quarter. However, the decision by one of the key automotive players to cut back on its use of heavy bulls was enough to
reverse the normal situation.

So, quite unexpectedly, hides have begun piling up, fuelling the process of price erosion that was already in place. For the remainder of the year, this situation is unlikely to change as the price (including subsidies) for live bulls remains attractive, encouraging farmers to sell slaughter-ready
animals. Incredibly, the prices for live bulls paid to farmers are now in many cases higher than those that prevailed before the BSE crisis. Though these price levels cannot last, this increased activity has been taken by some a sign of the beginnings of a recovery in the beef business. For our
part, we think it is still too early to say, though obviously we hope they are right.

Staying with the European live cattle sector, we have additionally noted that while prices for males have remained worthwhile, those for cows are now less so, with the price for hides and live cattle being virtually interchangeable.

The imbalance between supply and demand for bulls in Europe, as previously outlined, is creating a very peculiar situation. Because supplies for this kind of material are dominated by chilled and fresh hides - an area in which we have not seen a surplus for some considerable time - many smaller
processors do not have the facilities in place to buffer the excess. The tanners have wasted little time in exploiting this situation, with some managing to squeeze extra discounts out of their hard pressed suppliers by intimating that they might not have the same budgets in place in the coming weeks.

Despite the situation's undoubted advantages for the tanners in the short term, it could be storing up more volatility than is good for the market if it is not handled with care. Those European suppliers who can afford to buffer excessive quantities will most likely do so. Just don't expect them to adopt a sympathetic approach to their customers when the market turns their way! With the expectations for the kill in the first quarter of 2003 being what they are (i.e. down), this situation is likely to occur sooner rather than later.

What else has been noted in the past two weeks? In China, the trade certainly seems to have been badly impacted by the customs and tax fraud investigations that are ongoing. At the very least, they have led various tanners to reduce their levels of purchasing and general market activity while they reorganise their payment and import systems.

The partial payment system, where about 30 % of the raw material value was transferred from a
non-Chinese bank account so that only the remaining 70% was declared for tax has been well and truly rumbled by the authorities and it is a brave (or foolish) tanner who continues with the practice. The same applies to imports from Hong Kong and other Asian countries.

The arrests among tanners and their agents have obviously caused massive shockwaves, reducing overall imports. Chinese creativity being what it is however, it would be reasonable to expect that finance and administration systems will adjust to the new climate within a few months.
But for the moment, the situation continues to put a major dampener on trade - particularly
with the USA.

New information from the finished leather markets remains extremely sparse. As far as shoe leather is concerned, the signals are conflicting. While some consider business to be flat, others say they the volume of business to be stable, even if the prospect of growth remains poor. There is one common observation, however, and that is there is still no sign of a let up in the continuing decline in lighter weight hides and lower substance leathers. Tanners would appear to be requesting more and more medium weight material, with especially strong demand being noted from India.

The furniture business is in our opinion showing positive signs with few complaints being heard from European tanners serving the upper end of the market. This tallies with our assessment of the mood at Bologna. Automotive business worldwide remains steady with the decline in the number of cars being produced being more than offset by the more frequent use of leather in cars.

Garment and leather goods remained in the doldrums while sheep and lamb skins remained as they were in the previous period. The demand for double face lambs is slowing with the result that lamb skin prices are falling again. The demand for economical wool sheep skins for nappa look reasonably good in the light of the sharply increased prices for wool. The revenue for wool from fellmongering or shearing is reducing the price of wool-on-skins significantly.

The split market remained firm but more and more are saying that the top of the market has already been reached. The expected good demand for suede products in the coming months might still support the demand for suitable split types for this purpose. But other will struggle as the present prices rule out the use of splits in many other finished products.

What do we expect for the coming two weeks? We believe that prices for raw materials will continue to trade within the narrow price band currently in place. We are quite sure that the price correction for female products is already over but that it is too early to expect a major turnaround.
Christmas holidays and Chinese New Year should keep demand and shipments under a certain amount of control. With regard to male hides, we might see more volatility for the reasons outlined above. In America the market has yet to prove it has settled due to consistent demand from tanners - not traders' positions.

We must admit that with the recent price corrections seen in Europe, some of the main US hide types are now looking reasonably expensive. In Europe, the next two weeks should bring a further correction for male material and all the indications are that this will be the last of the current cycle. Most prices will as usual be pre-negotiated well into the New Year, which means we are unlikely to see any significant price fluctuations before the end of 2002. With many European hide prices now looking quite attractive, males cannot be far off their final corrected price.