In the two weeks since the last Market Intelligence, the mood of uncertainty that has characterised the world economic outlook since the beginning of year showed few signs of lifting. Few businesses have the confidence to commit themselves to anything more than short term decisions and - of those brave enough to say that they can see some form of pattern emerging - none have been able to say what its significance might be. Indeed, some idea of the continuing fragility of business confidence was demonstrated in the immediate aftermath of last Monday’s tragic plane crash in New York. Literally within minutes of the news breaking, the world economic markets had come to a virtual standstill for fear of a new wave of terrorist attacks. So business nerves can be described as jittery, at best.

However, other events were unfolding that suggest the outlook is not nearly so bleak as the pessimists are making out. Interest cuts in Europe and the US followed by a significant further upswing on international stock markets helped calm some investor nerves while presumably also helping boost levels of consumer confidence. Indeed – and contrary to what the supply chain had been predicting - retail sales in the US jumped up a whopping 7.2% in October. Even discounting the influence of 0% finance automobile sales, it was a very impressive result that could not have contrasted more with the picture painted by the manufacturing and retail sectors in the wake of the September 11 attacks.

Issues of macroeconomics aside, the contrasting fortunes of the various subsectors that make up the hide and leather industry were also highlighted during the period in question.

Hides related to side leathers kept their prices extremely well considering the wider economic climate – especially US sourced raw material which surprised many by showing signs of significant gains. The slide in automotive hides was also arrested as prices appeared to bottom out – at least for the time being.

No such signs of encouragement were seen in the market for furniture and garment hides however, where medium and high priced sales still appear to be suffering in the wake of the September 11 attacks – especially in the US which had been the main market driver of the previous two years. Some European tanners - having focused on the US market in recent years - have been especially badly hit and are now finding it extremely difficult if not impossible to compensate for their lost US sales. Demand from garment tanners in China and Korea has also not been enough to make up for the slump in European demand - even taking into account regular buying from Chinese upholstery tanners for the local market. Consequently, the market for dairy cow hides remains under pressure.

However, some mild optimism was noted among several Italian tanners whose new product samples have reportedly been well received in the US. There was better news also from the low end of the business where several large companies reported brisk business at last month’s furniture show in North Carolina - but only if the low price expectations of the retailers were met – a factor that is likely only to benefit those areas of the world that produce cheap leather.

The world bovine kill meanwhile appeared normal for the time of the year with seasonal highs in Europe and reduced numbers in the US. According to sources in the US, though a large number of ‘ready to slaughter’ animals are now in circulation, the beef business levels will need to pick up further before this additional supply potential can be realised.

Little excitement was noted in the sheepskin market where the new nappa season has yet to get under way and the double face season is in its last round. Because some re-orders had to be covered quickly, there were a few latecomers requiring skins for immediate supply – a factor which was enough to maintain price levels.

Demand for splits were seen to improve with lighter grades being favoured – presumably because of reduced soaks and the declining availability of splits from the US. The situation was all the more surprising considering that full, unsplit hides could be obtained for little more than the price of a split.  Complaints were also heard from a number of European lime split producers who said they were experiencing difficulties in disposing bellies and shoulders and other gelatine related products.

In the leather world meanwhile, all eyes were on Bologna. Though attendance figures were predictably down, there was a general acceptance that the quality of visitors was just as important as sheer numbers and in this respect the event could be viewed as a success. Particular buyer interest was noted on the second day and the atmosphere was generally upbeat, so why the mood deteriorated to the extent it did on the final day is anyone’s guess. Perhaps it was the dismal weather.

Despite conflicting reports, it appears that the shoe and leathergoods producers had quite a good Lineapelle, as did some garment tanners. After all the uncertainty of the first half of the year related to prices and the availability of raw materials, the fact remains that leather continues to be a highly fashionable material. Perhaps in realisation of this, manufacturers have calmed down and business levels appear to have returned to normal.

But the situation is not as straightforward as first appears. Following the unsettled market conditions of the first half of the year, long term order security and programmed ordering schedules went out of the window. But now that things are improving, hardly anyone is committing for normal periods – a situation that is pressing many into spot decisions and causing severe problems for manufacturers who operate factories. For the same reason, price discussions have also become very complicated, placing an additional burden on those tanners who have already been hit by the downturn in US business.

Apart from the general levels of business transacted at Bologna, one could not fail to be impressed by the number of Chinese visitors present at Tanning Tech - and in particular their interest in machines for new tanneries or tanneries that are undergoing expansion. This provided further confirmation that prospects for China remain good and that investor confidence in this market remains strong.

Of course, what this also means is that the flight of production eastwards, which has already seen the closure of several major US tanneries this year, will continue to gather pace. The fact that most projects in China are planned for furniture and car upholstery production means that the ‘classical’ areas for this type of production, such as Northern Italy, Thailand and possibly even South America, will all start the feel the same pressure in due course. When this happens, it will be the third major shift from formerly dominant production centres to China after the Korean garment and US shoe leather manufacturing sectors.

Another interesting feature of the current market situation is the discrepancy that exists between hide prices from the same markets/origins and also between apparently similar types and grades of hides. According to accepted hide quality/yield valuation practice, there is simply no reason why these anomalies should be occurring. Although a more intensive study of the subject is required, it is reasonable to assume that a key causal factor is the increasing inflexibility of the procurement channels used by tanners. Other variables might include:

• The increasing trend towards industrialised production requiring large volumes of uniform products

• Technologically-optimised production focussed on specific raw material types

• Supply chains based on a fresh supply of environmentally-compatible and cost optimised hides

• ‘Fast response’ production based on the prompt availability of hides from nearby suppliers

• Prescribed raw materials by the final customer

• ‘Just-in-time’ or inventory optimised production techniques

• Different price levels for finished products

• Integrated manufacturing with different added-value levels

Although this list is not complete it shows that in many tanneries, the purchase of raw materials is rapidly becoming much more production-orientated and that a shift away from value-oriented purchasing is in progress. Efficiency programmes aimed at reducing production costs are also making the raw materials purchasing process far less flexible than it once was – the result being the irrational price movements and unjustifiable price levels for various grades that we are now seeing. This is a fascinating subject in itself that warrants extensive investigation – but that is for another time and another Market Intelligence.

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