Most of the macroeconomic data released during the period was less than optimistic, with Alan Greenspan’s ‘beige book’, car sales in Western Europe and a number of consumer confidence indices all pointing to a slackening in the current rate of consumer spending.

The continuing decline in the major stock markets of the world did little to lighten the mood, portraying all too clearly the lowered expectations of the financial markets and the current unsettled state of corporate America. More worryingly, it hinted that the levels of consumer spending that have done so much to shore up the economies of the USA and Asia were beginning to falter.

The decline in the US$ slowed down while the currency markets waited for new directions. A further decline in the dollar was only prevented by the continuing weakness of Europe’s leading economy of Germany.

Prices for hides rose again in various markets. While the USA continued to be fairly well supported by a high level of weekly sales to the Pacific Rim, stability in the European market was maintained by the low kill in heavy hides. And though the kill failed to keep pace with the level of demand from the automotive and heavy side leather tanners, a week of strong sales in dairy cows saw to it that the price pressure that was beginning to mount in this sector was at least eased.

Currency fluctuations exerted a great deal of influence - at least in the European dairy cow market. While selling prices in US$ terms jumped by up to 8 %, this did little to assist € returns since the dollar had fallen by almost 10 % from its highs of two months previous. This, together with a protracted period of low selling beforehand, meant net returns were effectively not increased.

The market continues suffer from the dictates of fashion and the various rules adhered to by technicians, certification bodies and product specifications that prevent more raw material substitutions. This is seen in the ongoing large spread between hide types and/or origins.

However, the European tanning sector could hardly be said to be taking a pro-active stance in finding a way out of the situation. Though many European tanners continue to complain that their clients are unable or unwilling to take on board any price increase for finished leathers whatsoever, few if any appear to have made the effort to suggest what the raw material alternatives might be, so that a quality product can be created at reasonable cost.

Looking outside the hide market, then it can be seen that the split market for leather production remains moderately under supplied. Many tanners report delays in their supplies and uncertainty surrounding additional availability. Under normal circumstances, one might expect this to give rise to a surge in prices. Nevertheless, having undergone a re-valuation similar to that seen in the hide market in the last 8 months, split prices appear to have entered a holding pattern that the present supply difficulties have not been strong enough to disrupt.

As everyone knows, splits have always been more price-sensitive than hides. Currently the only other factor to differentiate the two markets is the firmer stand being taken by split buyers have been firm on prices and which has kept further price increases at bay.

In previous issues of Market Intelligence, we touched on the problems encountered by the European industry in disposing of split by-products to the collagen and gelatin industries. Expanding on this, we have taken the opportunity to interview a couple of the main producers of these materials in the past two weeks and it would seem that - even with expected decline in soakings due to the holiday season – no improvement in the situation is likely to be forthcoming.

Behind the current difficulties is the fact that the traditional market for split by-products, Eastern Europe, is no longer the force that it once was. In that most industrial users in the region currently have all the stocks they need, we can expect to see the situation we had last year in Western Europe being repeated this summer, with split producers experiencing major headaches with the disposal of their by products.

In fact, the problem has the potential to take on an even greater significance as soakings in Europe are not expected to decline significantly in the next three to four months. We fail yet to know how the situation is going to be in South America and other large production centres. However, we can say in all confidence that this will not impact on the production of splits deriving from wet blue splitted production. The demand for this type of splits remains good which means the problem is avoided from the outset. We will continue to monitor this situation closely, given its potential to seriously influence the European situation.

Sheep and lambskins have entered their seasonal doldrums. Turkish buyers are still looking for new season lambskins and despite the very low output of these in Europe and prices continue to fall. Sheepskins for nappa production are finding only limited interest from Chinese buyers at present at prices that are below the present market level. However, we would ascribe this to seasonal trends and for the next 6-8 weeks, both production and demand will remain low, perpetuating the downward pressure on prices. After mid-August, the outlook is likely to become brighter as many tanners and manufacturers are reasonably optimistic about levels of demand, especially from Russia.

In the previous edition of Market Intelligence, we outlined two scenarios and at the moment, would tend to the more pessimistic of the two. Regular readers will also note that we anticipated a weaker market. However we should point out that our aim is not to forecast short term price movements but rather the longer term trends, as it is these that the market.

                                       Spending

Due to the supply problems in Europe and the extremely large forward positions of American packers, there is presently still not enough product in the pipeline to create short term pressure. Looking at the indicators for the near future, however - at least for Europe - it can clearly be seen that both the demand for leather and market expectations will not permit the necessary increase in leather prices.

The difficulty remains making an accurate forecast of consumer spending in America and Asia.

The integrated manufacturing and lower labour costs of China enables Chinese tanners and manufacturers to pay higher average prices for raw materials than their European counterparts. Against the backdrop of the current macroeconomic situation (see introduction) – and in particular the severe decline seen in world stock markets in recent months - it would be more than a miracle if consumers in the USA were able to maintain their current levels of spending.

In Europe - and Germany in particular - short term recovery of consumer spending is also not expected. This leaves Asia – and the prices attainable for finished products in that region – as the unknown quantity. Taking the very high level of outstanding shipments in the USA into account, it would be unreasonable to expect demand from Asian tanners to pick up in the near future.

Higher kills in America and the summer holidays in Europe are also unlikely to be conducive to supply problems. The question then becomes whether the luxury goods and automotive buyers will continue to pay the prices currently being asked for the highest quality material. If they do not, then the prices of all grades are likely to suffer.

Bearing all this in mind - plus the fact that we are running out of season now and will only enter the new production cycle in September /October - we repeat our assertion that the market will have no option but to enter a period of price correction during the summer – probably in a range of 10 - 20%. The extent of this correction will be strongly influenced by currency issues and individual hide types.

In addition to all the issues of supply and demand - as well as prices - we would like to remind our readers that with the present higher price levels being reached, cash flow could become a critical factor. With prices tending to higher levels as they currently are, any problem encountered in the selling, shipping or payment of goods could very quickly lead to cash flow problems throughout the supply chain.

As usual we will keep a careful eye on matters throughout the summer. In the meantime, we wish all the remaining teams in the World Cup the very best of luck for their next matches and a nice and sunny June for the remainder.