Macroeconomics
There were some interesting developments during the period under review (April 19 - May 4) as GNP in the USA rose 4.2 %. The financial markets may well have been disappointed because they had been expecting a 5 % increase, but 4.2 % is still a big jump and shows US consumers are still spending faster than their European counterpart.
In Europe, economic expansion remained low. Germany again lowered its expectations as its growth forecast for the year was cut back to a mere 1.5 %, and there are doubts that even this can be achieved. The new member states of the EU joined on May 1 and after all the celebrations, within the next month we will start to see the winners and losers of the new landscape. Right now, the bureaucratic issues at the borders are massive. They will need to be resolved quickly if trading is to start in proper order. Many observers have also raised the issue of what the new order will bring in the medium term as the old ‘rich’ nations lose their wealth by exporting jobs and the new ‘poor’ entrants increase consumption, creating fresh opportunities.
In China, the government took the decision to control the growth of the economy and lower expansion by restricting credits, increasing interest rates and granting fewer permits for the construction of new factories. This mainly relates to the heavy industrial sector, such as steel, cement etc., but it will be seen in the coming weeks if this has an indirect impact on companies in the light industrial sector, which includes leather producers. The currency markets continued to trade within a narrow band. Variations between the large currencies traded within a band of 2 % and consequently did not have a great influence on business in the past weeks.
Market Intelligence
The leather pipeline closely watched the outcome of Lineapelle, held last week, and the sentiment was moderately positive. After the depression the European industry has gone through in the last year, any improvement has to be seen as welcome.
The most upbeat comments came from tanners serving the medium-high end of the business, in other words, those who had previously borne the brunt of competition from cheaper origins. Many of these reported improved levels of response, more frequent sampling and in some cases even orders for their products. This was especially the case in relation to fashion-orientated lighter weight leathers and some furniture leathers.
Not that any of this means that the market is ready for price increases. Indeed, many continue to seek price concessions, citing the decline seen in raw material prices in previous months. This is again having a detrimental effect on calculations, preventing the improved demand from being translated into higher raw material prices – at least for the time being.
European mass producers at the lower end continue to suffer from price pressure from China. For them life remains hard, whether in terms of footwear, bag or furniture leather. So, talking to them prompts the same old round of pessimistic statements as before. Europe’s automotive tanners are also complaining of mounting price pressure. Despite the demise of a small operation in Austria last week, new players continue to enter the market, increasing levels of competition and presumably further driving down prices. This has added to the already-increased price pressure from the automotive makers. Grain leather prices too are feeling the increased competition, plus the shift to cheaper products and leathers made from splits. The total price for a leather interior has to come down. In this segment therefore, it is not the Chinese who are solely to blame for mounting price pressure.
A tough challenge for the automotive leather producers will be to preserve the exclusivity of the product in the long term. The leading argument for a leather interior – image and increased second hand value – is going to be tarnished if leather in cars eventually becomes just a commodity. While the biggest losers are likely to be those who carry on without changing, it also presents an opportunity for those who succeed in developing better quality interiors. We will continue to follow this issue with interest.
The hide market meanwhile received a boost from Bologna and also the biggest American spring upholstery fair at Highpoint. The friendlier trend for hide prices had already been seen in South America and Australia and asking levels from hide suppliers were slightly lifted. But we have yet to see too much of a response from buyers. Although tanners agreed they weren’t expecting raw material prices to fall any further (maybe with the exception of US steers), they were unwilling to accept increased asking levels or raise their own prices. Most said they were well covered for the weeks to come or even until the summer holidays. Virtually all of them said they intended to wait a few weeks to see if the new levels of demand at retail would be sustained. Those sellers we spoke to were not so sure about their positions but many did not have the nerve to refrain from business and wait for better times ahead. Although sales have been quite good in Europe in the past weeks and the mood of the trade optimistic, price levels have remained unchanged.
Expectedly, we saw less activity from Asia. The flourishing situation for European retailers in the first quarter of 2004 was still having its effects and is quoted repeatedly, to justify rising European raw hide prices. We believe the hype of the last month will pass as business normalises. As usual, latecomers to the situation and the public at large are still talking about the things that have already occurred and it is this that is creating the impression of increased activity. Most of the key players in Europe we spoke to were of the opinion that demand had already peaked and that letters of credit were not coming in as fast as they were before. Follow-up sales were also demanding more effort. It was no longer simply a case of responding to bids received by e-mail every morning. But this might be explained by the holidays now taking place in Asia. This break has quite a dramatic effect, as most government offices and banks also shut down. We will see in the next edition of Market Intelligence whether the better tone set by Bologna and Highpoint results in renewed demand from China.
We will also watch carefully to see if the Chinese economy starts to slow. What is clear is that Beijing will intervene in the business world as much as it feels is necessary to keep GNP under control and close 2004 at the desired 7 % growth rate. So far, they have directed their actions to where they will have the most immediate effect, to the big and heavy industries such as steel and cement and it can be seen that related world commodity prices have reacted sharply, in many cases falling by up to 20 % in just a few weeks. The fear of the commodity trade is that China’s control over the import of many raw materials is becoming even more stringent. This is on top of the already-zealous approach adopted by Customs officers, as many hide importers will testify.
So far, the leather industry has not been subject to the same scrutiny, if only because the total volume is nothing compared with the steel and energy industries. But indirect influences cannot be ruled out. Neither can direct intervention in the medium to long term.
Elsewhere in the world, many leather-related retailers and/or brand names delivered very positive results. With their purchasing power and the declining raw material market since the May of last year, they have been busy increasing their margins. This will certainly make them more optimistic, even if the manufacturers that supply them have not been able to share in the benefits.
Certainly, the decent clearance of stocks in Asia and America will encourage them to place further good orders for the remainder of the year, external influences excluded. But with their success at driving product prices down, they are unlikely to reduce their greed and, barring higher raw material prices, it will be almost impossible to convince them to increase their leather product prices.
In conclusion, one can say that the European outlook has brightened. While the restructuring of the industry isn’t over, Asian producers can still hope for a good second half if growth levels don’t spiral out of control in China.
Turning to other segments, it can be seen that the lamb and sheepskin businesses are improving, with better interest being seen from Turkish buyers who are buying lambs and sheep in Europe. The new season has also opened in Northern Europe where prices of € 8-11 are now being seen, depending on origin and quality. High skin prices in the other parts of the world are assisting, but this has led tanners to fear that the general price of raw materials could again cause some problems in relation to finished leather prices and sales later in the year. We tend to agree that raw material prices are close to the dangerous levels reached in the past. Hopefully prices will not advance as sharply again. We don’t need another crisis in this business again.
The split market levelled out again and there was some confirmation that splits will continue to remain in favour as a cheaper alternative. The search for cheaper prices and alternatives continues and is easing concerns slightly. We don’t see any chance of prices going up, but for the moment the market can be called stable and only some adjustments will have to be made when we get closer to the summer. Also, the quality will become an ever more important aspect. Good quality splits will find homes much easier, while lower quality items might feel a lot more pressure in the next months.
For the coming weeks, we still have no reason to believe that raw material prices will not move out of their present price ranges. On the upside, we believe that the situation of unchanged levels for finished leather will keep raw material prices under control. As long as raw hides do not get really short (as is currently the case with sheepskins), there is little possibility that buyers will follow the significantly higher levels. On the downside, we think that the market adjustment for US hides (steers) could finish soon, as according to our calculations these are now only slightly overvalued. The UK is currently seeing high prices but we don’t expect these to last very long. Other markets will continue to trade well with only a few minor ups and downs being seen, depending on the day’s mood.
