Another fascinating two weeks for the leather industry saw perhaps the most important annual fair on the calendar take place in Asia. The Asia Pacific Leather Fair (APLF) was seen by most to be a success, even if economic news during the period was less positive than many had hoped for.

The last two weeks saw hardly any interesting general financial information released. The only data of any relevance were the retail sales figures from the US which, to the surprise of many, were below expectations, fuelling renewed discussion about the extent of the economic recovery due later in the year. A speech by Alan Greenspan was also less enthusiastic about the economic recovery in the US, confirming that some question marks still remain about the global economy for the coming months.

A general strike in Italy over government plans to reform labour law and continuing wage disputes by automotive industry workers in Germany seem to leave the way open for further unrest in Europe.

American industrial output rose significantly, mainly due to inventory replenishment, and the trade deficit widened to a considerable $31.5 billion - mainly due to strong increases in car imports.

The US dollar has left its long established trading corridors versus the yen and the euro. This was referred to in a previous MI where we recommended that everyone pay close attention to the currency markets. It is worth repeating that everyone should carefully analyse the impact of currency fluctuations on their business.

One expects after a long period of stability that the volatility of currencies will increase sharply. With the relatively small added value in raw and semi-finished products, currency movements sometimes extend influence on markets developments. The same also applies for many production costs.

A week after the APLF seems like a good time to analyse how the fair went, and look a bit closer at the situation in Asia with the help of a little distance and perspective. This issue of MI will also deal less with direct market information and activity and more on the broader view of the global market environment. To begin we will start with a review of the market activities and the results of the APLF in Hong Kong.

In general hide and skin prices did not change very much. During the Hong Kong fair many sellers’ expectations were disappointed with a low volume of business concluded and sellers did not succeed in obtaining their prices, which had been increased for the fair. Only specific types of leather were sold, and even then only in limited volumes. With many sellers being relatively well sold this was not a problem and did not lead to sinking prices. One week on from Hong Kong and some more business - in particular between Asia and US – has been heard of at more pre-Hong Kong price levels.

There was also no change in the overall buying pattern with side and automotive leather demand remaining steady or even very good. The furniture leather sector looks less exciting, but is still in its final seasonal production phase in Europe and so tanners have to stay in the market to cover their productions. There was no change in bovine garment leathers. There is currently very low production and since the present season seems to be entirely lost, everyone is instead looking forward to June-August production in Asia and talking about better business by then. For the moment however, classic dairy cow hides continue to be under price pressure and rumours about unopened letters of credit and delayed shipping schedules are often heard.

Price, in any case, is not the only reason for the problem. Neither the old contracts nor the present price levels for dairy cows are prohibitive for leather production. It would appear that the warm winter has compounded the effects of the September 11 terrorist attacks, leading to unsold inventories which means the supply pipeline is not flowing freely.

Assuming that discounts and sales in the late winter will have cleaned out some of the stocks, there might indeed be a fair chance for better business from June onwards. Having said this, one also has to realise that the present price level for lighter weight dairy cows is neither relatively nor absolutely high and looks even more attractive considering the price levels reached by their male counterparts.

What else was interesting in Hong Kong? Certainly, the levels of activity seen straight after the opening on Tuesday morning were high. Normally shows start slowly with a break in activity over lunchtime, but this wasn’t the case at all until Thursday afternoon. It seemed that most visitors and exhibitors had very clear programmes and appointments they were determined to follow through and stands were busy all the time. This impression was confirmed by many that we spoke to and there were hardly any disappointed faces to be seen.

By late Thursday afternoon everyone seemed to have achieved their aims and activity quickly dropped off. Friday then turned out to be more of an exhibitor to exhibitor show - many visitors had already left and the stands were packed up quite early.

A week down the line and the fair can safely be considered to be a success. Not because massive amounts of business were concluded, but more due to the quality of conversations and clearly structured plans, agreed sampling and strategies discussed. Many on the stands - including in the finished product section – confirmed that the show had fully met their expectations.

Perhaps the best sign was that even with all the positive news, nobody has become over-enthusiastic and there was not the over-bubbling of emotions one often sees at major shows. Most companies have become more realistic and rational about their business and its potential. With improving quality, lower costs, and in many cases good domestic consumption, Asian tanneries are the real winners in the present situation. Meanwhile, European leather businesses are continuing to struggle to defend their quality leadership as well as keeping their price levels in the market niches they have developed in the past years.

Although we do not profess to be the experts in finished leather, looking round the stands we were deeply impressed by the progress made in terms of quality in leathergoods, garment and furniture made in Asia. That is not to say that quality was poor in the past, but many producers have now made the final step to make them almost indistinguishable from many European premium productions. In our view this development supports integrated manufacturing operations in the region.

Many Asian producers now do more than just manufacture finished products for premium brands due to labour cost advantages. Until recently many were forced to import quality leathers due to the sometimes inconsistent or insufficient quality of domestic production. Along with the adoption of the latest fashion trends in leather, many now easily meet the expectations of their customers and are in the position to benefit from the opportunity offered by integrated manufacturing. This is reflected in the rapidly increasing imports of high end quality raw materials.

Leaving the Hong Kong show, let’s now have a closer look at general market conditions and try and understand why Asian producers have - at least for the moment - achieved their targets so successfully. A fact that is even more remarkable because of the negative influences of the global recession as well the terrorist attacks.

It has become clear that the world will have to accept that the markets in the US, Japan and Europe no longer control the ‘balance of power’. The aggregated manufacturing and purchasing power in Asia (led by China) is today potentially already higher than in these "old world" economies.

You might remember that after the tragic events of September 11 the big question for the leather industry was where all the products from the resulting delayed and cancelled export orders had disappeared. The answer is that Asian consumers began to spend significantly more and it has to assumed that a lot of inventory, but also new orders, have been absorbed by local area consumption. This took up the slack and explains why export business picked up relatively quicker than expected.

What we saw during our trips (active shoppers) has been confirmed also by recent articles in newspapers and magazines describing the rapid rise of consumer credit and the use of credit cards in South East Asia over the last year. Visa now names Asia as its fastest growing global market. Consumer confidence and spending in the area is now outpacing corporate spending by far. So, the missing consumption in continental Europe and Japan was largely taken up by retail in Asia outside of Japan.

It is also interesting to note that in Asia overall, but mainly in China, local fashion, taste and brands are rapidly building up. Chinese consumers are going their own way and have their own brands and tastes, which are also not particularly cheap.

The difference between east and west in taste and fashion can easily be seen in the leather types produced for men and ladies’ shoes. Although very demanding in terms of raw material quality due to little corrections and finishes, the leathers styles are significantly different from those seen in western fashion, but sell at very attractive prices.

This is one reason why Asian tanners - and in particular the Chinese - can afford relatively high prices for raw materials and concentrate (at least in side leather) even more on medium and high-end quality. Another benefit for Asian manufacturers is the enormous cost advantage over the entire production chain (integrated manufacturing) and the potential to market all selections to nearby producers or to use them up by themselves.

This avoids having to sustain quality write-offs and capital-absorbing inventories that so many other tanners in the world have to deal with and are so costly. This might also be the reason why Chinese tanners make their calculations so easily and you hardly see them make anything other than a ‘lump-sum’ run calculation where other tanners deal with long lists of articles and selections to arrive at their revenue.

Since this review has pretty much concentrated on side leathers we are now very curious to see what the next months are going to bring for the rest of the market in Asia. As mentioned in the previous edition of Market Intelligence (April 8, 2002) a lot of additional furniture production is expected to come on stream in the second half of this year. Major furniture manufacturers are either expanding or setting up facilities in China. This will either create additional demand for raw materials (likely) and/or just be a further shift of production. China’s well-publicised aim to become the manufacturing hub for the world would seem to be nearer fruition in terms of leather production.

Leaving the Asian focus and returning to the usual finish for MI and have a brief outlook into the coming weeks for raw materials.

After the Hong Kong show there is no reason why too much should change in the short term. The bottlenecks of particular raw material supplies persist due to low kills and steady demand. Female hides continue to look vulnerable as long as the garment business does not pick up and/or additional demand out of Asia for upholstery production will not support this raw material. We will concentrate to follow the currency markets as for the world outside the US dollar. This could influence things more than normal factors of supply and demand in the raw material market itself.