Macroeconomics
Macroeconomic activity was almost completely dormant during the period under review (January 13-27 2003) as the Iraq situation heightened levels of nervousness in the financial markets and beyond. Against this backdrop, the continuing strike and political unrest in Venezuela and normal round of economic indicators released had little impact.
The dollar lost further ground to the euro and yen while some smaller currencies such as the Mexican Peso lost even more ground than the Greenback. The outlook for the dollar remains weak - at least until a clearer picture about the Iraq conflict emerges. Whether or not war breaks out, the general economical data does not point to an immediate recovery in the dollar – even taking account of the technical and speculative reactions to the recent sharp falls.
Our regular readers will know how we have always emphasised the influence of currency fluctuations on the leather trade. At the moment, these could be said to be more important to the main European market players than issues of supply and demand.
Economic data released was not particularly encouraging. The US economy failed to give any clear indication of where it will go next and the only positive indicator to be seen was the new homes construction index which reached a sixteen-year high. The weak state of the German economy continued to cloud the outlook of the euro zone where only the UK continues to stay on track. But even here everything is not rosy as it has been as both real estate prices and consumer spending have showed signs of instability in recent weeks.
The world’s larger stock markets again fell by a big margin, although the public would appear to take much less notice these days and seems to have become acclimatised to the declines. This is inverse to the situation that prevailed two to three years ago, when everybody took little notice of the markets as it was assumed that they would always track upwards.
Asia and the Eastern bloc remained on course with their latest GNP figures. Without going into detail, most were in line with previous forecasts and continue to exhibit solid growth.
Market Intelligence
The Iraql situation and the currency markets have had a diverse set of effects, depending on where you are in the world. The influence of the seasons and different holidays around the world would also appear to be more pronounced than in previous years.
In general, the mood in the pipeline has been more cautious than is usual for the time of the year. Traditionally, raw material demand and production picks up markedly at the beginning of the year. However, the general uncertainty surrounding developments in the Middle East combined with the shaky outlook for the world economy has prompted many to keep their inventories at their lowest possible levels. As a result, levels of trading have been remarkably light.
Another limiting factor – in Europe at least – has been the need for retailers to walk a fine line between the optimum levels of stock to keep the business turning over, without taking on board the kind of luxury item that would remain stuck on the shelves if war with Iraq did break out.
While retailers in some countries are exercising greater care than others in this respect, a definite correlation has become observable between a country’s support for war and its economic situation, with the strongest opposition being voiced by those countries where the outlook is the gloomiest (Germany being the obvious example). Conversely, the strongest support has come from those with the healthiest economies (for which read United Kingdom, Spain as well as the USA). There is also a group of countries (e.g. China) that have taken no real standpoint as they consider the situation has little bearing on their long term prospects.
We believe that this correlation is no coincidence – the inference being that those countries where consumer confidence is already on the floor understandably don’t want things made any worse by war. At the very least, it just goes to show just how closely intertwined a nation’s psyche and its economy can be.
The business decision-maker cannot afford the luxury of such sentiment, however. Even though it remains impossible to predict the future, he or she needs to plan ahead on the basis of fact. One of the best ways of doing this (to our mind at least) remains taking a limited number of likely scenarios and having alternative plans in place, in readiness for each.
So let us give you our three scenarios. For obvious reasons, all revolve the Iraq situation – the first being the least likely in that it assumes Saddam is toppled by his own people before war breaks out. Were this to happen, we believe the economic consequences would be both positive and far reaching.
In the US, bolstered by what they see as a victory for the free world, consumers would become more confident and spending would climb accordingly. Oil prices meanwhile would fall, both reducing energy costs while creating fresh consumer interest in new cars. The psychological effect would also give European consumer spending a lift while the ‘peace dividend’ brought about the removal of one of the World’s greatest obstructions to peace would result in increased public spending. On the downside, by reinforcing the dominance of the US on the world stage, such an event would probably play into the hands of the Islamic militants, meaning that we would likely see no decrease in the risk of terrorist activity. In terms of the leather pipeline, this scenario would likely see a short but sharp rise in raw material costs.
The second scenario is one where the US and its allies launch an attack with in the next four to eight weeks and a quick victory is secured. It also assumes the rapid installation of a new, stable, Western-oriented government that is seen as being unlikely to fall victim to corruption. We believe this process would take no more than three months from start to finish and if anything - because of the relief factor - the effect on consumer spending will be even more pronounced than in scenario one. Sure, we might see a downturn within the first few days of the attack as people remain glued to their TV sets and the upturn in spending will take longer to come through, but in the long term it will generate extra spending.
And so we come to our ‘worst case’ scenario – where the US becomes bogged down in a protracted campaign that stretches into the second half of the year and sees high casualties. More terrorist attacks are committed in the Western world while destabilisation sets in the Middle East. If this comes to pass – and it is to be sincerely hoped that it does not - then we can expect a severe drop in levels of demand for luxury consumer goods of all kinds as rising oil prices take their toll on disposable incomes. At least as far as the Western world is concerned.
Within the countries we have already identified as having ‘no real position’ such as China, Russia and the Commonwealth of Independent states, spending is likely to continue unabated, though we can expect the fast expanding manufacturing sectors of these countries to be harmed by the downturn in demand from the west.
Do any of the two ‘attack’ scenarios have a bearing on the supply side? We don’t think so. Beef consumption is most likely not going to change too much – even if there is a slight reduction in the western world brought about by consumers tightening their purse strings.
Even though it is unlikely to remove the scourge of terrorism from the world, we believe that any attack, whether short or long, has to be a positive thing as it will bolster levels of business confidence in its aftermath while of course helping to create a freer world. In terms of the leather pipeline, it can also be expected to give raw material prices a short term lift.
Let us now conduct our usual market review of the previous two weeks and worldwide, it can be seen that almost the same pattern of business prevailed.
Cowhides were sold actively into the Far East (China, Korea) fuelling prices. It would appear that tanners postponed their purchasing decisions for so long that they had no choice but to replenish their stocks before their Lunar Year holidays. At around the mid ‘50’s they are now 10 % higher than in November/December. We should be careful not to mistake this as a sign of underlying buoyancy in the market, however. Rather, it is simply the outcome of an urgent need to buy. Low grades performed quite well as cow buyers tried to down-average their raw material prices by mixing lower priced and better quality hides within the same offerings.
Steer prices held steady and were firmer in the USA than in Europe where they remained weak. Again, this was largely the outcome of exchange rate fluctuations, though a normalising in demand from the automotive tanners also played its part. And though some sources reported a better than expected kill in Europe, the outlook for the coming months remains negative. There was also talk of unsold inventories resulting from the high November/December kills while in the USA the long expected downturn in the kill remained as elusive as ever with the result that US sales, export shipments and slaughter remained in equilibrium.
Split sales were reduced and due to very good forward positions among some producers there was little pressure to sell. Those producers of split leather that needed to fill some production holes meantime were able to find their material here and there. For European producers of splits, the fall in the value dollar has started to become a problem as being lower priced items, they are more vulnerable than most to currency fluctuations.
Despite of the positive mood seen in Istanbul, European skin prices fell sharply. With the new production cycle yet to get under way, tanners showed themselves unwilling to take market risks by buying in advance. From what we hear, the fast-approaching introduction Russian import tax is also having a disruptive effect – both in terms of current levels of trade and the ability of exporters to plan ahead. Looming over everything of course is Iraq situation which has caused Turkish tanners and garment producers to sit tight. As a result of these factors, trading activity in Türkiye has all but ground to a halt and we would not be surprised to see further short term declines in prices.
Against this unsettled political, economic and military backdrop, it is almost impossible to arrive a sensible prediction. What can be said for certain is that market activity will slow down as the Asian holidays approach. In Europe, those tanners who operate on a regular procurement basis will have no choice but to come back to the market in the first half of February while their non-regular counterparts can be expected to stay out of the bidding until they have a clearer picture of what’s happening and feel more secure about their finished leather orders. All of them should be asking themselves what the substantial fall off in the value dollar means for their business.
For the immediate future, with inventories remaining obstinately below normal levels, any easing in international tensions can be expected to spark a round of buying.
