Macroeconomics
Both current financial markets and economical data demonstrate how uncertain the world is at present about the future. The market has found a level after the Iraq war, but remains extremely volatile.
Facts are frequently being ignored and the financial community is treating speculations and trends as being more important. This is demonstrated by the example of the US consumer confidence index, which is extremely positive, despite the declining US dollar exchange rate.
Currency exchange rates have been of major interest over the past two weeks. The Euro, which has been uncertain over the past few years, has now become the world’s safe haven. During the past few days, it has extended its gain over the US dollar and the British pound. The US dollar has dropped 4% since Easter and the British pound has declined 10% in value to £0.70 against the Euro, since the beginning of the year.
European stock market expectations have improved due to declining oil prices. However, it is expected that exports will suffer when orders already made in foreign currencies expire over the next few months. The competitiveness of European companies is also eroding rapidly.
The decline in value of the US dollar is the only chance the US has to reduce its trade deficit. Despite the official statements that have been made in the US, one has to believe that the official policy of the strong dollar has been changed to a weak one, as long as the capital flow into the country is not significantly reduced. This is a dangerous game as the exchange rate could collapse and international investors could lose confidence. This proves how currency exchange rates affect businesses. It is also proof of the benefits that global players operating in the various currency areas have. It is extremely important for raw material and leather producing industries to check their exposure to currency issues, global players, however, can take it easier.
China has reported a 9.9 % increase in its first quarter GNP, while European rates have declined and Germany’s expectations for 2003 have fallen to less then 1%. The results posted by leather companies are mixed, but are by far more positive than negative. adidas has delivered strong results, in line with other brand names in the athletic footwear market. The company’s advancement into the fashion world has improved its success dramatically.
The automotive industry has delivered mixed results. While car sales have continued to decline slowly in Europe, the results in the US are varied. Companies that have enjoyed a good market reception for new models, for example, the BMW Mini and the Porsche Cayenne, have generated strong first quarter sales. Other companies, on the other hand, suffered massive sales losses during March. Sales at GM fell 22.5%, Ford declined 2.9% and Daimler Chrysler’s sales fell 10%. Predictions for the summer are also low and only Ford has increased its production plans for the coming months. The second half of the year may be more promising when many new models come onto the market.
SARS remains the strongest psychological factor in the business world. While some regions such as Hong Kong and Singapore have a declining infection rate, the disease is still spreading rapidly into mainland China. Although the Government is taking drastic measurements to gain control of the epidemic it is unlikely that, within short, the problem can be solved.
Hong Kong is already trying to return to normal and so are the organisers of the Asia Pacific Leather Fair. To regain travellers’ confidence and attract visitors and exhibitors to the postponed exhibition scheduled for the end of June, the show’s organisers have distributed information stating that infection rates have fallen. In any case it seems that fears over SARS have been stirred up so much, that it will require a very high level of security to attract people to the region.
Market Intelligence
The general trend and the frame of market conditions have not changed significantly during the past two weeks. With the exception of dairy cows, prices continued to fall and buyers maintained strong control of the market.
It is difficult to explain why the strong demand for dairy cows has shifted from Europe and back to the US. Slaughter rates were relatively low and due to steady and consistent demand, prices bottomed out and later increased again between 2% and 3%. The fact that prices are again around $50 is considered to be a long term average. European suppliers, however, are not in favour of the market increase, since the devaluation of the dollar has absorbed all US price increases. Steer prices declined again almost all over the world. The largest decline was in the US, where uncertainties over the future of the economy and the SARS virus have had the greatest impact.
The price of one of the main items, heavy Texas steers (HTX) fell to almost $60 (FOB basis), which allows the largest shoe tanneries in Asia to operate profitably. When we talked about range trading in our last edition of MI we estimated that this price would be between $60 and $70.
The price developments and decline in sales experienced by heavy native steers (HNS), demonstrates the obvious worries of the US automotive industry. HNS has for a long time been almost resistant to declines and market variations. If the demand for automobiles does not improve, HNS will face further trouble in the near future. European tanners may, however, become more interested in this material due to low supply levels and the value of the dollar.
This leads us to the European market where prices are declining, but the speed and the extent is slowing down. Although the business situation in Europe is particularly difficult for the majority of tanneries, falling supplies are allowing butchers and processors to resist reducing their prices. Auction prices have fallen marginally in Zurich and results in Spain are almost stable.
Europe’s slaughter results for the first quarter have declined between 5% and 20% depending on the country. More accurate data will come in over the next few weeks as many countries are late to report their figures. However the figures explain why - despite complaints about the leather business - inventories are said to be low and the few and large busy tanneries are absorbing most of the production. The high amount of holidays in May also adds to the problem. Europe’s slaughter figures are traditionally low between May and August while in the US the barbecue season has the opposite impact.
In South America, tanneries and footwear manufacturers are doing good business and Brazil is performing exceptionally well. SARS in Asia is probably, at least for the short term, supporting production in South America, which explains why the region’s raw material prices are steady.
In the splits market demand and sales are strong, however concerns are mounting as it is difficult to believe that SARS has not affected this market. This comes on top of the arguments which we have raised previously, stating that the price relation between splits and full hides cannot be justified on a long term basis. In Europe we are approaching the summer season, which is a problem period for disposing of the gelatine part of the splits. There is currently only protection against a sharp correction in split prices in the reduced productions of hides. In any case we recommend that one should be attentive about splits sales and shipments, as the splits market can be rapidly influenced by delays in transportation.
The sheep and lamb skin markets have performed well. While China experienced reduced interest due to SARS, Turkey had a strong revival. The end of the Iraq war has allowed Turkish tanners to check their inventories and consider their business in the coming months. The inventories were, unsurprisingly, extremely low and many tanners have had to act quickly to get raw material delivered. This coincided with the start of the new lamb production season in Europe and thus active trading began about ten days ago. As there is short term demand for and limited availability of the new season lambs stocks, last season’s produce was sold much more easily.
For the coming weeks, most interest will be focussed on the Bologna leather fair which is scheduled to take place next week. As APLF has been postponed traders have not met up for some time. Mainly European, South Americans and Americans will take the chance to travel to ‘safe areas,’ however it is possible that Bologna may also be cancelled. Asian visitors, however, may be limited as they will either face travel restrictions or could be deterred by the possibility of going into quarantine at the end of their trip.
The leather industry is particularly interested in what new trends tanners have developed for the coming seasons. We don’t expect that the raw material markets will deliver too many surprises in the coming weeks. Prices, in our view, will not change greatly, except due to currency variations. The next week should deliver more information about the outlook of the leather industry, the Bologna show and the willingness of Asian tanners to buy raw hides at reduced levels on return from their holidays. With this information in hand one will have a better idea about the summer 2003.
