Macroeconomics
As the build-up to war in Iraq continued, no let up was seen in the rise in commodity prices during the period under review (January 27-February 10) - with the most obvious being seen gold and oil. Though some observers believe the Iraq situation was behind these hikes, we remain unconvinced. Meanwhile, the stock markets continued to slide while attempts to revive the dollar fell flat. At least its devaluation lost some of its momentum.
The normal economic indicators were as contradictory as ever. Though US consumer confidence fell again in January, the housing market remained strong. A similar situation prevailed in the UK where GDP slowed and mortgage lending stayed very high. Unemployment figures in the USA came in slightly ahead of expectations, raising hopes that the economy might not be in such bad shape after all.
There was also a glimmer of hope that the German economy might one day get the far reaching reforms it needs with the ground gained by Conservative opposition in the local elections. Overall, however, the underlying data provided few clues as to the future health of the global economy. It would appear that in common with everyone else, the economists of the world are waiting to see what happens with Iraq.
Market Intelligence
The leather pipeline reflected the wider picture, delivering not too many surprises. Despite the Chinese New Year celebrations, business between the US and Asia continued uninterrupted, while South America and Australia were able to maintain reasonable levels of activity as firm prices were sustained. European activity was all but non-existent. Trade with Asia dropped off from the highish levels seen in January as the Lunar Year holidays approached.
European tanners were forced to wait and see how slaughterhouse prices would bed in for the year – a process would appear to be ‘business in progress’ in continental Europe. Among European tanners, hopes were raised that the weaker dollar might act as spur to business during February. However, as there was a very decent US kill in January, the expected slowdown did not materialise until the beginning of February. This was very pronounced when it arrived, taking many market players by surprise – but not so the butchery trade. One can therefore expect negotiations to remain difficult for the foreseeable future.
As in other parts of the world, the supply situation provided the driving force in the American market. A reduced offer of live cattle and high prices for the same kept the big packers out of the bidding. But even with the increase seen in January, the kill in the USA was still low for the time of the year.
The important market of China is presently on an almost two week vacation, while the other Asian countries have either closed down for a much shorter period or – as in the case of Thailand - they have yet to start their New Year vacations. Business can be expected resume slowly but surely in China over the next week and it will be interesting to see how tanners and manufacturers react when they realise that the hiatus of the past couple of weeks has not resulted in lower raw material prices and that in many cases the opposite has happened! Their reaction will clearly signal their inventory position. If they are undersupplied then their entry into the market can be expected push prices up higher. It will also likely result in another round problems related to the conflict between rising raw materials prices and existing high levels of overcapacity in the tanning sector.
At least the demand for leather goods in 2002 was quite healthy. Most companies that publish accounts did well and numbers of units sold were steady or better than in the year previous. Retailers in many cases complained of small margins, but not of high inventories, raising the possibility that order levels will not be that much lower in 2003. What we might see however is a delay in orders, as retailers adopt a ‘wait and see’ approach to the Iraq situation. Footwear business orders for the winter season are also not due yet, arriving March/April.
The automotive sector continued to give off mixed messages. Having already seen their home market implode, the German marques also had to endure poor US sales in January. At least they could take solace from the fact that January is not seen in automotive circles as a reliable indicator for the rest of the year. Right now, the US ‘big three’ must be hoping the weak dollar will enable them to maintain 2003 sales at the previous year’s level of 16 million units – and this would not seem unrealistic. But again, Iraq and the oil price situation could scupper this.
So, Iraq aside, issues of supply will remain the determining factor in the hide market. While the lower price of hides has depressed the demand for splits in Europe, there were some reports of big orders in Asia. Unfortunately we have no information on price levels, except to say that it can be assumed the prices were below those that a tanner could be expected to pay to cover his immediate raw material needs. It could also explain why many suppliers were able to report stronger than normal levels of interest from old and new customers. Even so, the prices these suppliers were offered for their pickled, brined and wet blue splits were well below acceptable levels. So, even though the demand might well have been there, it didn’t count for very much as tanners persisted in calculating their prices at unworkable levels. In general, one can say that the demand for splits in Europe fell significantly while in the Pacific Rim interest held firm. Either way, there wasn’t that much selling activity because of the prices being offered.
Trading in sheep and lambskins remained difficult. As China is still on holiday, the season has yet to get up to speed. And though many suppliers reported sales enquiries, few of these were converted into sales. With regard to Turkey at least, some increase in supply can be expected as supplies come on stream from the forthcoming round of religious festivals. Indeed, having lost 30-40 % of their value since September, lambskins are now looking more attractive than they have been for some time. If the positive impression gained from the Istanbul fair in January is not completely misleading, one can expect demand to improve before March and for prices to stabilise. Supplies from new season lambs in Europe can also be expected to be good.
As nothing fundamental has changed from the last edition of Market Intelligence, we do not propose to repeat the same outlook for the next two weeks as we did last.
However, we would advise our readers keep a close eye on:
a) The kill in the raw material origins they buy from
b) Activity levels in Asia and in particular in China after the return from the holiday period
c) Currency market developments
In November, we forecast reasonably attractive hide prices for November/December and - some currency influences notwithstanding - this proved to be the case. At the moment, everything points to hide prices moving higher in the near future, but with the increases being kept in check by the recent hikes seen in US prices. Overall, with a low slaughter, the start of the production in Asia and the Hong Kong Fair now on the horizon, it would be reasonable to assume a moderately firmer market in February/March.
