Macroeconomics

Our previous worries that the dollar would continue to slide during the period under review (May 19 -31) came to fruition as the currency struggled to get below the $1.20 mark compared with the euro.

However,  the poor European outlook and better indicators for the US economy could begin to effect a change, though the dollar’s long term prospects will depend heavily on the development of the major economies in the second half of the year.  The positive data from the US appears to becoming more stable and frequent.  Not only were the latest unemployment figures down, but the rise in the consumer confidence index beat all expectations, jumping 9.6 index points to 94.4.

Strong gains were seen in another closely watched indicator for the wider economy – the Chicago Purchasing Managers Index.  This climbed sharply to 52.2 points, where an index above 50 signals expansion, below 50 contraction, and an index of 50 neither contraction nor expansion.   This does not resolve the fundamental problems attached to the large US trade and budget deficits, however, but growth and the devaluated USD value can be expected to help with these. It is still too early to celebrate, but the situation has definitely improved.

The SARS problem in Asia is also slowly abating, with fewer reports of new cases emanating from the South and Hong Kong. The consensus is that daily life is returning to normal.

While a lot of disturbances in the world are calming down,  developments surrounding the Middle East remain a major concern. The verbal attacks on Iran by the US could be seen as preparation for another military operation in the area.  The same could be said of George Bush’s present European tour to relax relations with France and Russia. A new war would certainly have an adverse effect on the financial markets and the global economy in general.

Market  Intelligence

The past two weeks continued to be quite exciting as far as the markets were concerned. The continuing decline of the dollar put further pressure on European hide prices and coloured the  mood of the European tanning industry in general. Only the large global companies and international shoe brands that import large volumes into the US are enjoying the current  situation. Their profits are rising as they have been able to keep their retail prices reasonably steady. The fashion brands have also managed to hold retail prices steady, and this situation can be expected to continue for as long as their products remain in vogue with young fashion oriented consumers.

The American market in general and the US market in particular continued to dominate the world picture.  What with the Canadian situation, one might have expected North American prices to rise sharply, as they did in Europe three years ago.  However, the rally was very short lived as the fear among US packers that they would not be able to shift their huge weekly productions reasserted itself.

The way in which the Canadian BSE case was handled was questionable, to say the least, and one has to wonder why it took a full five months for the cow at the centre of the scare to be diagnosed, especially when the test itself takes only a matter of hours.  The case also served to underline the power of the US beef lobby and how much more expert the industry is  in exploiting the situation than its European counterpart. The Americans wasted no time in exploiting the problem by pressing their authorities as well as other importing countries to impose extended bans on Canadian cattle products. It proves how much of powerful political tool BSE has become. Adept as the Americans were in making hay, however, they could be seen to be storing up long term problems as people in the industry have long memories.  In other words, the old adage;  “What goes around comes around.”

On a different front, if the hide demand picture is currently so bleak, then we would sincerely like to know why the latest figures from the USDA show exports running at half a million units PER WEEK.

And while Asia is still battling SARS, numbers of cases are well down on what they were before.  The hope is that the worst of the epidemic is over. What has yet to be determined, however, is whether the wave of infections is still spreading outward from Asia. But from Hong Kong and the South of China, reports of a rapid and steady return to a normal life style are increasing.

The increasingly positive indicators from the US (see macroeconomics) support the hopes that consumer demand in the United States will pick up in the second half of the year. Only Europe remains in the doldrums while Germany remains the same lame duck that it has been for some time. 

One area that is often overlooked is Eastern Europe and here it can be seen that  the positive trend for consumer products and their consumption remains intact. Production and consumption of many products including textiles, apparel, shoes, leather jackets and furniture is continuing to escalate. Even though the rise started from a very low level it cannot be ignored, especially as the former Eastern Bloc represents a market of more than 250 million people.

So the global demand for consumer products will at least stay stable for the coming months and might even begin to increase after September or the summer break.

This will not help the European tanning industry and the structural decline of the Western European tanning industries can be expected to accelerate, as can  the shift of production Eastwards. One has to be concerned about further payment problems in the leather pipeline in Europe.

The parlous state of the European industry was underlined last week when a well-establish Dutch hide trading company unexpectedly declared itself bankrupt.  Though a specific set of circumstances were involved, the episode clearly illustrates the wider structural problems facing the European industry. Over the past two years we have seen voluntary and forced shut-downs involving both large and small organisations  and the disappearance of some well known names ( e.g. Connolly, Vivapell, Sacomar, Costil, Ronan, van Buren, etc).  The only certainty is that this process will continue.

Turning to other issues, the persisting demand for splits can be seen as a symptom of the deflationary pressure that we have warned about in previous issues of MI.  From being a non-issue in the past, deflation is now being openly discussed and debated in the global media. And while many are still playing the problem down, it should be remembered deflation has been present in Japan for a long time and many consider that deflation has arrived in Germany too. It is also being discussed in relation to the US economy, though all the signs are that an increase in consumer spending will avert the problem.  As the increasing use of splits makes plain, issues of quality no longer hold sway in the mass produced sector of the industry. In many cases, price is the only determinant.

We have to admit that we strongly underestimated this development which means we now have to consider that splits will continue to play an important role in the leather business. The price spread between splits and hides will likewise remain narrow, helping to keep the lid on hide prices. The increasing demand and the use of splits has clearly played an important role in the deflation of hide prices over the past nine months.  In that a split can only be generated when a hide has been tanned,  imbalances between the demand for hides and splits are not just likely, but inevitable.  It should also be borne in mind that in the past splits have never been thrown away.

The sheep and lamb skin business slowed down bit down and the activity we have seen in Türkiye reduced. Prices have not changed very much and we will have to wait and see what the months of June and July bring, though it is to be hoped levels of demand will be regular. Less supply from traditional markets such as Australia can be expected and these should support prices  in the coming weeks.

For the period ahead (to mid-June),  we don’t see things becoming any more settled.  Neither do we expect a turnaround in the weaker price trend now in place.  Expectations of very high kills in the United States are easily compensating for the sharp declines seen elsewhere, including Western Europe.  Also the forecast for the kills in South America remain reasonably high. So we might see a stabilisation of European hide prices after the sharp reductions taking place at the moment while other markets will most likely continue their slide. However we repeat our recommendation to analyse price levels in the months of June and July.  There could be some very attractive prices out there. Don’t let them pass you by!

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