A two-speed pricing regime for cowhides takes shape
As with the leather and hide trade itself, the availability of data slowed to a trickle during the period under review (June 30-July 14).
The general outlook remained positive, with the concern it could be a mirage for those desparate for good news. The high level of consumer debt in the USA remained a worry, as did rising US unemployment which reached its highest level (6.4 %) in nine years. The stock markets extended their gains and most analysts are moderately optimistic for a recovery of the global economy in the second half of the year.
The European Central Bank left interest rates unchanged, leaving the door open to further declines in the autumn, if the economic recovery in the eurozone is not developing as expected. The dollar extended its gains from the temporary lows seen at the beginning of June. This was due to the expectation that the economy will recover earlier and more intensively than those of Europe and Japan.
In Japan, the mood was also better than it has been for some considerable time, with hopes being expressed that the economy will one day escape from depression and deflation. As a result, the Nikkei Index rose sharply, coming to within sight of the 10,000 level. The closely-watched Tankan report also delivered positive results and saw industrial production up by 2.5 %. Large international Japanese brand names are now cautiously admitting that they might be through the worst and are looking more optimistically to the future.
The car industry delivered mixed results. Some volume manufacturers in Europe (VW, Ford, GM) are suffering from the poor market conditions. Loss of sales and cuts in production are the result. Other manufacturers (BMW, Japanese, Korean importers) are making gains either on the back of attractive models (Mini) or big discounts. In the USA the automobile market forecast for the second half of the year is becoming more positive and analysts expect sales to increase after the summer to 16.5 million year which would be one of the top-level results.
Market Intelligence
As with the wider world, the leather pipeline is in a holiday mood which means activity is cooling rapidly as many markets enter the low seasons of production and demand. Consequently, this edition of Market Intelligence is shorter than usual, though it is to be hoped the quality remains as high as ever!
The past weeks saw the expected slow down in the hype that had been evident in the weeks before, as the markets and activities levelled off in the USA. Here, the sharp price gains of the previous weeks were digested by the players while hide producers were able to rest on their laurels having comfortably extended their forward positions. In Europe, sellers and tanners were incredulous at the excitement and the market rebound seen across the Atlantic, especially as it was so far removed from the depressed state of the trade at home.
Looking at the raw material markets more closely, one can see massive discrepancies between the grades and origins. Dairy cows in Europe are a good example of how different one part of the market can become from the others around it - even when talking about similar and comparable raw materials.
From Market Intelligence and many other reports, readers will know that the business for dairy cows is much better in Asia than in Europe and that price levels are basically set by the premium suppliers from the USA . Why then has the price difference between a standard European dairy cow in Asia and in Europe increased by as much as 25 %?
The reason is the cumulative effect of the following factors:
A. The continuing ban on raw hides from some European countries in the main leather producing countries of South East Asia, due to BSE and Foot and Mouth. Because hides from Italy, Spain, Portugal, UK, Czech Republic and others continue to be barred from China and South Korea, the main takers for such materials tend to be European.
B. As long as there were sufficient leather orders, there was suffient demand for dairy cows in both Europe and Asia. Consequently, the price for such raw materials was more or less the same, whether in Asia or Europe. However, the sharp decline seen in the dollar and the seasonal reduction in demand for European-produced (mainly Italian) furniture has seen the consumption of dairy cows in European tanneries slow since mid-May. With no alternative outlets, the suppliers in the countries subject to the cattle disease-related import bans have had no alternative but to lower their prices. The non-restricted exporters of Scandinavia, Germany, Holland meanwhile have been able to maintain their Asian exports and thus their prices have remained in close contention with those of their US counterparts. Factor in the rise in the dollar and it can be seen that these exporters have been to increase their returns accordingly in the past weeks.
An interesting observation related to the above is that although the European furniture tanners and manufacturers do not enjoy the same low production overheads as their Asian counterparts, they are nevertheless able to take advantage of significantly cheaper raw materials. As a result, we feel that the complaints of European furniture manufacturers that their raw materials prices have not adjusted in line with the downturn in their business cannot fairly be laid at the door of the raw materials suppliers. Rather, it is symptomatic of the continuing globalisation of the industry and the continuing shift in production to the Far East - a subject we have commented on on numerous occasions.
This leads us to the unfortunate fact that every day, more people are coming to realise that the European leather industry - and in particular the Italian furniture leather producers - are now entering an extremely difficult phase. They have lost market share and only an economical miracle can now bring it back. This is underlined by the Chinese Leather Industries Association (CLIA) figures that were reported upon in the news section of leatherbiz.com last week. These showed that between January and April 2003, leather product exports from China were up by 25.2% on the year before.
The other segments of the leather business held less excitement. The shoe business continues to be reasonably steady and no particularly interesting information was released.
In the automotive industry, things on a global scale once again seem to be improving, but not for everyone. As stated already in the macrooeconomic section, the Japanese and Korean manufacturers are continuing to gain ground while the massive growth of the Chinese market is more than evident in the 98 % leap in new car imports in the first half of 2003. Add to this the continuing massive investment in Chinese manufacturing facilities by BMW, Mercedes Benz, VW and it becomes easy to see where the main centres of demand for automotive leather will develop over the next few years.
Elsewhere, demand for sheep and lamb skins continues to be steady. Double face production remains in full flow and supply and demand are in relative balance and everyone is now waiting for the start of the next nappa season. Prices remain reasonable stable, even taking account of short supply, which was not previously detected. Only by the end of August, when the real production starts, will it become apparent whether or not existing inventories are sufficient to cover demand.
The split market is not yet showing any particular signs of a reduction. However, a momentary slow down in activity and demand is discernable. This is especially the case in Europe where demand for split leather for shoes is in sharp decline, even taking into account seasonal variations. However, we maintain our opinion that splits are greatly overvalued and that therefore there is a massive danger of a price correction, despite the relatively balanced supply and demand situation.
In summary, we are not expecting any major departures from the current market situation in the coming weeks. As far as we can see, the key suppliers and producers of raw materials worldwide are comfortably sold until at least the end of the holiday period. At the same time, a large part of the tanning industry will be on vaction. Consequently, trading volume will be light with only the Asian and South American producers being able to influence the global market. Most likely they will be sensible enough not to create any significant market variations. Buyers worldwide also seem well covered until the end of the holiday season and maybe even beyond. As a result, we see no reason why readers should not go on holiday feeling reasonably secure about the situation. However, a weekly phonecall back to the office and a daily check of exchange rates is advisable for those who want to rule out the possibility a completely changed situation when they return to work!
At the very least, the potential for price rises is greater than decline.
