Most of the macroeconomic data released during the past two weeks was within the expected frame and had little bearing on the international leather markets. Probably the most important news was the end of major strike action in Germany and the continued weakness in the US dollar, but neither development was significant enough to effect much change in the markets.

As with the wider economic picture, the hide skin and leather markets underwent few major shifts during the period. Nor were any developments for the near future signalled.

The most noteworthy event by far was Lineapelle in Bologna - the last big ‘get together’ for the leather world before the summer break. Sources at the show confirmed a continuation in the trends established at earlier events, namely:

• More and more leather business is shifting to Asia.
• New trends for leather styles have not been seen.
• European retail sales and manufacturing remains the main weak spot of the market.
• Prices for leather are under pressure in volume production, which is reflected by tanners producing less expensive articles and selections.

Attendance levels were noticeably down on previous years while the overall mood could best be described as flat. At least the current low price of finished leather is entirely consistent with the classic cycle of the leather industry. As a high proportion of leather contracts expire around this time of the year, many tanners turn their thoughts to next season, balancing new product price levels with the present availability of raw materials and inventories. Retailers and manufacturers however have been unwilling to exceed their budgets due to consumer pressure. As a result, the mass produced market is currently tending toward cheaper leathers or lower selections.

It should be noted also that European tanneries in this part of the market are facing increased price competition from low cost countries. It has been mentioned in earlier editions of Market Intelligence that the quality of Asian leather has come on leaps and bounds in recent years, becoming acceptable even in demanding western markets. With lower production costs, the Asian tanners are also able to spend proportionately more on better quality raw materials – an advantage which has seen them gain significant ground in the furniture and shoe upper leather markets.

In that European tanneries are now fast losing their competitiveness in the mainstream marketplace, they can increasingly be expected to concentrate on the premium sector and value added production. They are also likely to differentiate themselves by bringing new products to the market faster and by capitalising on their logistical advantages they still have in the markets in their own region.

A frequent topic of conversion at Bologna was the current weak state of the leather manufacturing sector in France and Germany as what applies to the tanners frequently applies in equal measure to the manufacturers. In addition to cost problems, the footwear and furniture sectors in particular can be seen to be suffering from a weak European market. Many producers are also finding themselves hamstrung by their failure to have developed an overseas distribution network. Those companies that are thriving in today’s market conditions are those that have been successful at developing export sales or their relationships with brands that operate at a global level.

Rumours in Bologna were rife of reductions in orders of up to 40% from German premium dress shoe manufacturers, as well as reports of various furniture makers in Germany and France having their credit cover cancelled. If true, this would be very bad news and certainly darkens prospects for the future.

Nevertheless, quite a number of tanneries said they were satisfied with their business but suffering from the present raw material price levels. Since these tanneries generally serve the premium end of the market, they are limited in their selection of raw materials and the range of products they are able to offer.

Probably the most badly hit group in this respect were the producers of extra heavy and thick leathers. Not only are these in direct competition for raw hides with the powerful manufacturers of automotive leathers but they are also faced with the fact that - for whatever reason - heavy and plump hides of good quality now appear to be in shorter supply.

For their sake, it is to be hoped that the second half of the year will see a higher kill of heavier cattle. However, even a period of higher slaughter weights is unlikely to break the current general trend for lighter cattle, which is largely being driven by the supermarket chains demanding specific types of beef.

In the previous report we relayed our concerns relating to rising raw material price levels while predicting a weaker price trend. While a moderate correction was seen on female hides in Europe as well in the US, no price correction was seen in male hides.

Given their close correlation with the US dollar – and with no sign of a revival in the bovine garment and furniture businesses - it is easy to understand why female prices corrected so readily. We see on males probably the opposite happening in the short term, however. Strong demand from the automotive tanners persists and the producers of thick quality leathers still have to supply their existing contracts before the summer holidays.

For the Asian tanners, present price levels in the US are still affordable and their order books seem to be quite full.

With a moderately declining kill in the US, which was unexpected, and continuing strong interest from Asia (displayed in the recent export and sales figures released by the USDA) there is little pressure on producers to sell, meaning prices can be expected to remain firm.

Any hope of relief in the market based is likely to come from the summer break followed by the traditionally larger and heavier slaughter in Europe.

Let’s now have a brief look at the other areas of raw material and leather production.

In the sheep skin market, we saw many unsuccessful attempts made by Turkish tanneries to bring spring lamb prices down, with the result that the high asking levels of producers were mostly accepted. This might be attributed to a smaller-than-anticipated supply of spring lambs. Indeed many European markets speak of significantly fewer lambs have becoming available citing lower meat prices, lower meat consumption, and even the introduction of the euro! Wool sheep skins were by contrast weak, with sellers reporting great price resistance and low bids due to the poor nappa garment business.

Splits are still doing quite well and the effect of the relocation of volume leather production to Asia can be seen with increasing clarity. Relatively high hide prices have also supported the demand for splits and so prices remain on a steady to firm level. When its does arrive, buyer resistance can be expected to be both stiff and sudden. This is because the threshold at which splits become less attractive to manufacturers is far more narrowly defined than with hides.

There is no clear perspective for the near future so perhaps it is better to say that at least we don’t expect anything of major significance to happen in the coming weeks. We still believe currency issues might still hold more influence than issues of supply and demand. Most tanners in the western world are now looking to the safety of the summer holidays as very few of them are finding it easy to operate profitably.

In Asia, the driving force is likely to be orders rather than margins. As it is already mid May and the Asians are still buying actively, one can only assume that the purchasing cycle has become extended by a month or so. If not, the volume of business and demand in that part of the world must continue to be very good. This might also explain why cow hides continue to remain steady, because the production of furniture leather in China should increase by August/September. It should come as no surprise if cow hides become increasingly attractive to the furniture sector as they are still reasonably priced compared to most other hide types. Since there is still some time to go before such interest arrives there might be still a chance for bargains.

For the rest of us, the best thing might be to plan cautiously until the vacation arrives and to start thinking about how best to handle next season’s requirements. More about this in the next issues of MI.