Over the last two weeks the most important economic development was probably the GNP rise of 5.8% for the first quarter in the US. This occurred at the same time as declining consumer confidence in the US and rising unemployment rates, however, and spending in the construction sector also fell. Manufacturing output meanwhile rose moderately for the third consecutive month. Another piece of bad news from the US was that orders for the coming months declined. The German IFO index was likewise down against expectations.

On the positive side of the equation, a number of large premium brand owners released some fairly impressive first quarter results including LVMH, Coach and Puma (see the leatherbiz.com news section for more details) with increases in sales and profits reported across the board. They were followed by the European premium brand car manufacturers who reported strong car sales in the US and other external markets (Asia) but poor sales in their own countries.

The expected rise in the volatility of currency markets took place with the US dollar losing more ground to all other major currencies. We would recommend all whose business is affected by currency fluctuations to stay on high alert and to explore all the scenarios of changing currency values. Tensions seem to be on the rise and one has to be prepared for possible sharper reactions.

The last fortnight was not very exciting as far as price fluctuations and general business activity was concerned. The price wave rolled out and levels remained pretty much unchanged in most markets. The Zurich auction last week again marked sharp gains, but we don’t consider this to signal further rises in raw material prices. Not only do prices have to be compared with the levels they were at six weeks ago, it should also be borne in mind that Zurich is a niche market and it seems that many tanners wanted to be sure they were covered until their holidays. The results posted by the premium brands mentioned above confirm that business in the premium segment was and may still be rather good.

All other markets have been fairly static since APLF and speaking to informed sources who are willing to disclose their actual business situation, demand would seem to be declining moderately.

This is not really a surprise looking at the calender. The period between the end of April and middle of June contains the largest grouping of national holidays in the world. In Europe there are several one-day holidays and in Asia there are "Golden Weeks" as well as long May holidays. All this serves to slow up commercial activity as well as reduce production volumes, thereby taking the speed and the pressure out of the demand side of the market. Hides which were in abundant supply will feel this first, followed by those discussed in previous editions of Market Intelligence which are in short supply.

The biggest pressure will still be on female hides or the types predominantly used for garment and (non-premium) furniture leathers. This is not only because demand has never been as strong as for shoe and automotive hides, but also because of currency issues - at least for the European suppliers. Export prices have never really followed the firm market trend and only the weakness of the euro has assisted in the calculations. Raw material prices react immediately but leather has a longer time lag and some of the leather exporters could see the problem coming when they went to the furniture show in South Carolina. Good quality producers reported at least steady demand from US manufacurers, but also price pressures, which were amplified by the weakening US dollar. So, in terms of contracts for next season many are hesitating to build in currency windfall profits into the calculations as was done regularly during the lasting period of a firming US dollar.

At the present time we don’t need to explore the subject too deeply as it is too early to say whether the turn-around in the US dollar is already a fact. The economy in the euro-zone is still not really picking up and political uncertainties in France and Germany might negatively affect the euro once more. We also need to keep an eye on the German metal workers which could interrupt car production if the wage dispute is not settled in time. For those more interested in the currency question we recommend taking a look at last week’s BigMac Index in ‘The Economist’. In our view this has been closer than any other specialist in forecasting the medium currency market.

Assuming, however, that the US dollar is losing some if its strength - and we don’t need a devaluation of 20-25% as some fear - it would certainly weigh heavily on the competitiveness of European leather and leather product manufacturers. For raw materials and their suppliers it is less of a problem as the raw material prices adjust quickly to local currencies. But for manufacturers it would mean a rise in their production costs in international terms and this would benefit the Asian producers again, who calculate in US dollars and already enjoy cheaper costs anyway. Many companies in Europe with a strong export base have benefitted strongly in the past from poor conditions in their domestic environment. So, with fading export revenues it would require a strong recovery at home to compensate and, although politicians and institutes are not giving up on predictions of a better future, there remains some doubt over the European economies.

Summarising the situation, it seems that we need a further boost in demand in Asia to bolster the present business and market situation. The Western markets are now entering their sesaonal decline. Summer is traditionally not the time for high production and retail sales. Members who follow our news section will have read the article about China’s Haining leather zone, where garment leather companies are being asked to move more into furniture production. This is something our sources were reporting from trips to China in the first quarter of the year. If this shift in production took place it could trigger a new round of buying to support the market over the next few months as it is unlikely such a change or expansion in production is sufficiently covered in terms of raw materials.

Turning our attention to other sectors of leather production and raw material it can be seen that garment nappa production and prices for lamb and sheep are still suffering from poor demand. Nobody sees any improvement here and hope seems to be fading for a short term change in the environment. For next season, however, lamb nappa should be an attractive product for designers and the price of leather could certainly not be considered prohibitive at present levels.

Tanners – mostly from Türkiye - are still desperately monitoring the market for lightweight spring lambs. They disappear immediately when with offers for the first quantities available and we believe that asking prices are approximately 20-25 % above the levels calculated when prices for finished garments were quoted in January/Feburary. So with this in mind, many are deciding to wait, hoping that with the increasing supply of lambs over the next months not only will sizes go up, but prices will also come down. It seems at present though that the truth, as usual, will be somewhere in the middle.

Demand for split leathers continues to be steady or rising slightly with prices firming moderately. We are in a classical cyclical period where – due to relatively high hide prices – splits are being used as a substitute. Many European split tanners are starting to feel the shift of tanning operations to Asia, as less splits in total are available. As far as we understand it, the problem persists with the gelatine by-products with yet more regulations planned in Brussels. One has to wonder if the bureaucrats understand that another raw material is in danger of being lost to production abroad, when the basis of manufacturing is taken away in Europe. This is not the first and will not be the last time.

Taking a look into our "crystal ball", many of our indicators are showing signs of weakness and consequently weaker raw material prices. A collapse like we saw last year should not be expected, however. Aggregate demand is still too strong and although inventories are fairly well replenished they are not too high. As stated, Western production is now entering a phase of seasonal decline and this will reduce raw material demand and also shipments, which is even more important.

Goods in the warehouse have always been the strongest argument for a seller to discuss prices. The most important fact in our opinion is that many hide prices no longer reflect obtainable leather prices in the market. In this type of discussion, we always exclude the top quality, premium brands and niche markets, but for the mainstream we are in dangerous territory and with consumer demand and retailers profits not so brilliant, it is unlikely that manufacturer prices will adjust on the upside.

Consequently we expect the markets over the next two weeks to be under moderate pressure, maybe a little stronger in non US dollar countries because of currency issues and price slides. Supply seems to be improving, at least in the US. The price move might be fragmented in its extent and the items still in restricted supply will need some time to adjust also in sympathy. For the mid-summer period we will keep a very focussed view on the Chinese market to see if expansions and shifts in production will create additional demand. This could occur soon, but generally the Chinese producers are smart enough to grab the opportunity to buy when everyone else is on the beach.