Market Intelligence

As the year ends, Asian tanners’ thoughts turn to European hides

Macroeconomics

The positive news continued throughout the two week period under review (December 1-15). At least people appeared to be thinking more positively, which is probably the most important thing. The stock markets made further gains as the Dow Jones climbed above the bellweather 10.00 threshold for the first time in a long while and the wider US economy continued to expand.  A key indicator was the closely-watched ISM manufacturing index which rose to its highest level for almost 20 years, as did levels of productivity. More surprisingly, the Japanese business survey (Tankan report) displayed its best results for the past 6 ½ years while the US unemployment rate fell marginally to 5.9 %.   Levels of unemployment in Euroland at least  remained steady at 8.8%.  The US Federal Reserve opted to leave interest rates alone saying recovery in the economy was not yet solid enough to justify short term change. It is to be hoped the European Central Bank follows the same line.  China’s inexorable rise on the way to becoming the manufacturing hub of the world was meanwhile underlined by the 18 % rise seen in industrial production during November against November 2002.

Oil prices continued to rise in line with demand, but there were signs from OPEC that prices could rise above the long standing and informally agreed $25-30 per barrel price range. In Europe, most of the rise has so far been offset by the weaker dollar, but in other countries the effects of the price rises can be expected to be felt sooner rather than later.

The dollar fell further against the other major world currencies, dipping to new lows against the euro at $1.23 on Friday (December 12). The financial world says that the bottom has not yet been reached, but that we should not be unduly worried.  While we cannot speak for other industries, in terms of the European tanning industry we are now very worried, given that the Chinese currency is pegged to the dollar.

Finally, there was yesterday’s capture of Saddam Hussein.  Though resistance to the coalition forces in Iraq will no doubt continue, the Saddam’s incarceration at least removes the figurehead of one of the main groups involved.  If not a turning point, it should at least be viewed as the positive development that it is, as evidenced by the big opening gains seen in the world’s stock markets this morning. 

Market  Intelligence

The past two weeks delivered most of the expectations we made for the period, which can be neatly  divided into two separate sections. During the first week, developments were dominated by the ‘wait-and-see’ attitude that we had forecast, as most buyers held out in the hope that  prices would drop in line with the low levels of purchasing activity. Their wait was in vain, however, as prices continued to be bolstered by low slaughter levels and sufficient forward positions, particularly in the USA.   

In the last days of the second week buyers, especially in the US,  had no choice but to pay the prices being asked for by their raw materials suppliers, as they needed to replenish their inventories.  Outside the US, however, many origins  struggled to attract bids, continued to sidestep or they even softened slightly due to currency fluctuations. Asia has finally become the lynchpin for market movements that we always said it would, and only those hide grades that have made inroads into this market can now take part in general market developments.

An example of those hides excluded from the action are European bull hides, which continue weigh under the pressure from the European tanners.  Despite their attractive price levels, they have yet to find a  regular and consistent customer base in Asia. The standard user of this material is European and these customers are taking every opportunity at the moment to exploit the wider market ennui, lowering their purchasing levels.

During the period,  reports of new buyers turning up in the marketplace continued to do the rounds.   These booked moderate quantities, presumably to test European hides as an alternative to standard products from the USA and Australasia.  The rumoured purchase of the warehouse of the defunct Dutch Van Buren operation fits well into this scenario. It appears that a Chinese business that used to buy from the Dutch hide trade for the Chinese market has bought the premises and will employ part of the old workforce.  This was an especially interesting development, given that it illustrates the extent to which the Chinese are now looking to add a new downstream element to their supply strategy.  Regular readers will know that in previous editions of MI we predicted that the Chinese would seek a greater involvement in the marketing of their finished products.  To be frank, we never thought they would take the same direct involvement downstream as well.

As it is, little is known about the investor involved, their intentions, or their ability to manage this operation successfully,  What is known is that the European hide business is nervous, not least because for the first time in a long while, there is a new player in town.  The trade can also see the attraction this will have to the continent’s main butchers, who might now be tempted to sell direct from the abattoir door.

We will continue to keep a close eye on the development, given its potential to create structural change in the same way as the concentration that has taken place in the beef industry, the introduction of new veterinary regulations and other strategic level shifts we have dealt with in the past. Returning to the leather pipeline, despite the firmer tone seen in some of the key grades, little movement of consequence has been seen and we do not expect massive turbulence in the weeks ahead.  This leaves room for another general change in the present market order, specifically in terms of semi-processed hides, and it is this aspect of the market we turn to next.

Though it is something not widely talked about, the fact remains that the semi processed market is going through a period of massive structural change at the moment.  In the 1980s and 90’s many hide producers and processors decided to get into the processing and  marketing of wet blue hides. This applied to all the main supplying markets, excepting those that did not permit the export of raw materials.

Economies of scale was the buzzword with a strong correlation being drawn between the size of the operation at the point of hide production, and levels of efficiency. The bigger the operation, the better quality would be too while transportation charges would be reduced and environmental issues better protected. In the 90’s specialisation was added to the equation as the hides became available in selected grades.

But in Europe contract tanners now producing wet blue and nothing else are struggling, regardless of their size.  As exemplified by the demise of Michell in Ireland, simple blueing operations with no other services to offer and/or value to add to the semi finished product are having a difficult time in the face of rising costs and more stringent environmental regulations. Small wonder that some are now looking to relocate to the former Eastern bloc.

It all goes to show just how much the landscape has changed since the Chinese entered the fray.  While the  transportation cost argument never really cut much ice  (shipping costs were in any case low),  China’s low production costs and strong added value chains mean the country’s tanners have little interest for imported wet blue material, at least not at a worthwhile price to the seller.  And it is here that we come to the crux of the problem. Many wet blue producers, in particular from the USA, are producing and selling still large volumes, but the prices being fetched are not even enough to their cover production costs.

While some producers (packers) are maintaining their wet blue operations, it is likely these are being retained for strategic reasons and subsidised by the normal cured hide sales. No surprises then that more and more processors are pulling out of wet blue. It is now virtually impossible to generate added value for the service when the price of the raw material is so high in the first place, having been artificially inflated by the prices being paid by the large Asian tanning operations. In Europe meanwhile, tanners have always in any case preferred to buy their own raw materials meaning that where they did occur, most wet blue sales were derived from short term requirements, not from tanneries that had closed their beamhouse or speciality operations. On top of this has been the appreciation of the euro, further eroding the competitiveness of these materials in the international markets.

The big question is then;  as a saleable commodity, is wet blue set to become a thing of the past?  We don’t think so, but it will be difficult for the remaining operations to hang on until things start to balance out and get better. With the rise in mass production, the room for nichers and specialty producers is growing. The big producers of hides will keep their wet blue operations if only for strategic reasons.  Those dedicated wet bluers that survive will do so only by offering more specialities, enhancing their flexibility and continually improving their service.  Let’s now take our customary round up of the other market segments, starting with splits.  These continue to hold out  pretty well and our previously expressed view that the customs issue in China would not be such a problem would appear proven. With slowly rising hide prices, some of the downward pressure on prices has also been lifted. Supplies are limited and as a result the split market continues to hold in a solid trading range. Don’t expect any major changes here until well into the New Year.

Lamb and sheepskins also remained within established market patterns. Woolsheep enjoys good demand because its price – combining good value for wool with a cheap pelt for nappa production  - is very reasonable at present.  But we would not be surprised if prices started to rise in January. Lambs are more difficult. The prices currently do not lend themselves to cheap nappa production and the double face season is almost finished. We expect to see some re-orders because business in Turkey for finished products is quite good. But demand will be patchy. So it would be no surprise if lambskins eased a bit price-wise.

What do we expect for the remaining weeks of 2003? We have said for quite a while that the week at the beginning of December would be decisive – and it was.  The USA market is slightly firmer and though the European markets remain weak, at least they are steady. Asian interest is now shifting to European hides because their massive price differential with other origins can no longer be ignored.  We believe this could deflate a bit from the upward momentum seen in the USA and support European hides. To cut a long story short, we would not be surprised if by mid January we were more or less on the same levels we are today, but with a firmer undertone to the market. For the first quarter we are more positively disposed to the market, particularly in Europe. We have to repeat again, however, that everyone involved should however keep a careful eye on currency exchange rates and have an idea in advance of what major variations will mean to their businesses.

In the meantime, all that remains is for us to wish you a happy holiday period and a peaceful and prosperous 2004.

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