Macroeconomics

Everything is in the summer doldrums, including the general financial world and main statistical indicators.

Of the corporate results that were released, for every good set there was a bad one as the market forecasters alternated between positive and negative. So, as far as the finance and business markets were concerned, no clear directions were evident.

Mr. Greenspan assured the markets that interest rates would stay low for as long as he considered necessary while not ruling out further reductions. Low interest rates support consumer spending as they leave more cash in people’s pockets.

The US trade deficit widened again to a massive $46.8 billion.  Expert opinion remains divided over whether the trade and the budget deficits are harming the US economy, or if consumer debt has reached critical levels. The consumer confidence index of the University of Michigan rose. This indicated that low interest rates are supporting the housing market as new housing starts also increased, by an appreciable 3.7 %. This might be a positive sign and the leather industry can hope for more furniture to be sold in the USA after the houses are finished.

In Europe, Germany surprised the world with a record leap in business sentiment but then came the prediction that unemployment will hit 5 million this winter.  Also here one can pick for the future what he chooses.

Shoe manufacturers delivered mixed results for the second quarter.  Reebok shone with solid gains in sales and profits while confirming its positive outlook for the full year. However, its main competitors said they expected sales to slow in the second half.

The US dollar lost a bit of its appeal towards the end of the period, having previously seen a three month high.  Rates fell below the 1.12 mark and it ended the two week review period at 1.15.  It would appear that variations of 2-3 % within the space of a few days are becoming the norm.

Stock markets defended their gains of the previous months, but also here the good news was followed by bad, so not much change was seen overall.  Solid growth, even though a bit reduced due to the SARS problem in the second quarter, was again reported from the Far East.  China’s GDP rose 6.7 % which was far below expectations but still impressive. Russia’s industrial output climbed 7 % showing that this economy is also keeping to a positive track. It does not seem that the global economy will deliver any great surprise in the coming weeks, the only potential hotspots of activity being in the currency markets and happenings generated by political issues (Middle East).

Market Intelligence

As mentioned in our previous issue,  reports and market information have reached a seasonal low. So we will keep our analysis reasonably short.

Trading activity in Europe came almost to a standstill as tanners and hide producers exchanged their best wishes before jetting off to the sun. By the end of the period under review (July 14-28), almost all tanners in Central and Southern Europe had gone on holiday, but in the knowledge that the relative peace of the past weeks or months will not persist. So sales were limited to regular programmes or minor volumes where tanners felt that small parts of their production still required coverage.

It has to be said that both buyers and sellers did not to try to inflate the facts to improve their positions. Buyers appear quite happy with present price levels and were reasonably well covered.  The low kill all over Europe and the fact that many of their number were well sold up meant that most sellers did not want to risk higher levels of unsold inventories after the holidays.

Consequently, the market was in perfect balance and prices did not move very much in this part of the world.

A similar situation prevailed outside Europe where holidays are not such a great issue.  Selling activity meanwhile declined as prices traded in the 5-7 % range that we forecast a while ago. This saw low end tanners buying so as to keep sellers’ positions intact. Unlike their high end counterparts who backed out, leaving sellers serving this part of the market to reconsider their asking levels. Also a perfect balance here and one has again the impression that the big players, both sellers or buyers, are quite happy with the status quo.

The only group that seemed unhappy with the current situation were the traders, who are less concerned about price levels that the direction in which the market is headed. These tried to inject some activity into the market by cranking up the rumour mill and talking the market down.

There were two possible reasons for this. Either they still had to cover some of the short sales they effected during the slump of the market in May/June (very likely), or they were looking to build inventories for good times ahead (less so). Whatever their intentions,  it would appear the traders that are supporting the market for the moment, as paradoxical as that might sound.

It has to be said that the hide producers received a beating when the market fell sharply as they failed to defend against aggressive traders’ short selling tactics.  As many of them have regained control of the inventories, sales and futures in the past few weeks, however, it can be assumed they will now be looking to make life difficult for the trade in the coming weeks.  As a result, it might become difficult in the near future to find sources of supply for  larger volume trade.  But at the end of the day this is of little consequence to the tanner, hide producer or the wider market. The big question is how leather demand will develop in the coming months. 

Right now, almost all the negative factors that have burdened the market over the past 3-6 months are fading fast. The war in the Middle East, SARS, and the turmoil in the currency markets are all receding into the distance.  At the same time, companies and economists are delivering more optimistic outlooks for the second half of 2003 and for 2004.  

But this proves nothing. A far better indicator for what will be happening 6-12 months down the line have always been the raw materials and hides and skins markets themselves.

Encouragingly, many of the market leaders we speak to are confirming that their business outlook and order income is positive for the rest of the year.  Having said this, they stress that growth will be in direct relation to the prices they can offer their customers. Deflation in consumer products remains a big fly in the ointment as far as the leather pipeline is concerned. Despite good or better demand, the supply chain still expects lower, or at least, steady price levels.

So, at the end of the day, without a massive imbalance in supply and demand or fears of an early return to consumer price inflation, a sharp rise in raw material and/or leather prices is unlikely.    The supply side is not expected to deliver any big surprises. In America the kill will moderately decline while in Europe we should see the normal seasonal increases.

Neither has much activity been seen in the sheep and lamb skin markets. Prices on paper may look reasonably high but trading activity is in fact very low. In the Turkish market, the build up of inventories in readiness for the Cash and Carry business to Russia has been finalised and the large orders for the winter season will not be placed before the end of August. The split market has also been reasonably quiet and demand for splits is meeting a seasonal lows in production due to the holidays. Asian buyers are not finding the type of splits they need at present, nor at the prices they want to pay.

We fail to find any reason why the period of inactivity should not continue.  Though there is the danger that the Asians could buy large volumes of raw materials, leaving the cupboard bare for when the Europeans return,  we feel that the next weeks will not deliver much excitement and that prices are unlikely to break out of their current trading range. Given the current relaxed inventory situation, neither are we expecting to see lower prices at the end of August.  All that leaves is for us to wish our readers a nice, sunny and relaxing holiday.

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