To start with we would like to wish all our readers a very happy New Year and hope you will continue to enjoy reading Market Intelligence into 2002 as much as we enjoy collecting and analysing information about the leather pipeline.

Despite the fact that other reports on the leather industry have made a great effort to be quick this year, we don’t intend to be the fastest but rather the most relevant - we prefer to work on a "just-in-time" basis.

Since the last MI, there has been more economic news and statistical data to be digested. In many countries Christmas sales were significantly better than expected and the exceptionally cold winter in the south and east of Europe boosted the sales of double face jackets and winter boots.

Other notable events were the financial turmoil and political unrest in Argentina and the decision by the European Central Bank not to change interest rates. Euro notes and coins were finally launched successfully and most of Europe is now making payments in the new currency.

In the automotive sector, premium brand car manufacturers in Europe are taking a positive view of 2002 though the big three in the US and volume manufacturers worldwide are in more negative mood. Most economists are sticking with the prediction that the global economy will recover in late 2002 while others have already pushed it back to 2003. They are really smart!

Early in the New Year is generally not a good time for reports about the leather pipeline. Most of the world was on holiday until last Monday (January 7) and so there is a correspondingly small amount to report about business activity. As far as demand goes there was some patchy interest from the Asian countries and latecomers who needed immediate shipments prior to their seasonal holidays. All that this confirms however is that no one was too excited about raw material business after such an eventful year as 2001. It also meant that there were no desperate sellers or buyers at the end of last year or the beginning of this one. As a consequence, price movements have been minimal.

The drop in activity gives us the chance to look a bit further into 2002 and go back to what we said about the year ahead in mid-December. Do we see any major changes? Not really. The exception might be that the bovine garment producers in Korea and perhaps in China are probably the only ones in leather manufacturing who still see no light at the end of the tunnel. Almost all of the other leather manufacturing sectors are either already reporting a better business or are at least looking more optimistically towards the future.

A lot certainly depends on how things progress at the many trade shows we are expecting in the weeks to come. The Detroit Auto Show has already taken place, generating plenty of reports and analysis, and that is now followed by several important events for furniture manufacturers, fashion and garment designers and also an indicative shoe show in Italy. The PAL (Panamerican Leather Fair) might well be the one of the least importance to the trade.

By the beginning of February at the latest we will be able to collect enough information to have a better understanding if all the events confirm the underlying optimism of many. One thing is sure: the reduction of stock for consumer goods since November means much more room for replenishment in the pipeline and that at least gives the potential for more interest and production in the months to come.

Speaking to many before and after the holidays we were able to discern one major trend in the leather industry. More than ever the gap seems to be widening between the successful and less successful companies. While the reasons for successes are often different, there are common factors that can be identified which remain crucial: quality, design, flexibility, customer-care and supply-chain alliances all play important roles. That is why even in a particularly difficult business environment such as that experienced in 2001 we found quite a number of companies that managed to grow and produce quite acceptable results.

Considering the conditions facing the leather industry - very high raw material prices on average, the onset of a world recession and the impact of the terrorist attacks of September 11 - these companies will be extraordinarily well positioned for the coming year. Success stories also prove to the rest that even when times are hard a clear vision and good structure in a company can bring rewards even under trying circumstances.

Having said that, conditions have been difficult, worldwide sales of consumer goods and cars over the past 12 weeks have been particularly good and this should cause a ripple effect throughout the supply chain. We can now take it for granted that in most cases burgeoning inventories in the pipeline have been cleaned up and no news about payment problems means that the cash flow situation should also have improved.

At this stage we should again exclude garment manufacturing, particularly in Korea. In our view, this sector is laying down a solid base for a general recovery in the next few months.

However, unemployment continues to rise suggesting the market is not about to experience a dramatic reversal of fortune. There is no reason why we should see overwhelming consumer spending in 2002 which would prompt another boom like that which was seen in 1999/2000.

Would anybody even be interested in such a boom? We think not. Major imbalances caused by economic booms create more damage than gains in the long run. One can also only hope that many remember that all the hype seen for different reasons in the past have never constituted a real trend (see previous MI). The present situation of general balance between supply and demand at moderate price levels is offering manufacturers a break and a period to concentrate on product development, supply management and the restructuring of their businesses. Those doing so, will most likely be rewarded and they will be better prepared for the next wave of uncertainty which is almost certain to come.

Where in the world can we already see indications of turbulence? And where should we be paying attention and watching carefully? At the moment we have of course the unsettled situation in the Middle-East where reduced media attention does not mean that the situation is being resolved. Many aspects of the political and financial situation in Argentina could also be highly influential for our business. Not only does the default of debt repayments disturb the financial markets, but we should not forget that Argentina is one of the leading suppliers of bovine crust to the world. The significant devaluation of the Argentinean currency could also have a major impact as well as disrupting supplies if riots and political unrest flares up again.

Another major risk factor in our opinion might be a return to more speculation. After such a severe correction as we have seen it in the last 6-8 months, traders could regain enough confidence to create a price rally just for their own sake. We have seen two such attempts already in the US market over the last six months and even though the effects were short lived a lot of uncertainty was created - purely for the packers’ short term gains.

We hope that everyone has noticed that there is a fair chance that things are turning out for the better but the ground is still very fragile. For the sake of the trade and a solid recovery we would recommend to act cautiously and to keep emotions under constant control as the New Year progresses.

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