In contrast to previous review periods, the last two weeks saw an extremely high level of activity, both within the trade and across the international markets in general. Significantly, there was also a great deal of volatility in the financial markets – something that we warned our readers to expect – as stock markets tumbled only to correct at the end of last week.

The slide in US$ also continued apace – a development that took many by surprise. This again was in line with our predictions. We hope our readers were able to act on our advice and cover their eventual currency risks in time.

This time around, we recommend keeping an eye on the South American currencies. Not so much for their influence in the world currency markets, but their direct relevance to the hide supply side of the trade. Changes in the value of the Argentinean Peso or the Brazilian Real can make a big difference to the hide and skin market and after the problems seen with the Peso, it now appears that it is the Real’s turn to take a battering.

The main economic indicators in the world’s largest economy were far from encouraging, with the closely watched University of Michigan economic survey reflecting the continuing decline in consumer confidence. In the latest survey, both the ‘Consumer Sentiment’ and ‘Personal Finance Outlook’ indices fell by four points while the survey’s ‘Expectation Index’ fell five points. As is increasingly the way, the media and politicians chose to put a positive spin on things, saying that because the figures weren’t as bad as some doomsayers had predicted, the outlook wasn’t that gloomy. It would appear the proper reading of statistics has become a thing of the past.

Something else that would appear to have fallen from favour is the adherence of large corporations to correct accounting and bookkeeping procedures. The Worldcom fiasco and other stories of ‘creating accounting’ now hitting the headlines are bound to undermine investor confidence in the long run. It appears neither the size of the organisation – nor the standing of its accountants – are any guarantee of surety. Fortunately, there are only a few publicly listed companies in our trade. Stock options and IPO’s are also the exception rather than the rule. Sometimes, maintaining the status quo can be a good thing.

Let’s start – as usual – with a quick review of the general market of the past two weeks. Generally speaking, we have seen the expected worldwide and seasonal slowdown of business activity and despite some individual spot demand, particularly in Europe, the total volume of trading was remarkably subdued.

The sharp devaluation of the US$ was nicely reflected in price developments. While USA hide prices started their descent untouched by issues of currency, prices in the other main hide producing nations reacted in line with their own currency developments. While for example Brazil had fewer problems with a devaluating currency, the Europeans in general hardly were hit. The increasing value of the Euro and £ Sterling left European suppliers very little chance to adjust their prices to international levels. The very low seasonal kill all over Europe also offered very few opportunities to adjust hide prices at the abattoirs. With the next round of abattoir buying in most parts of Europe now almost upon us, it is to be hoped that prices return quickly to workable levels. Otherwise, those who are strongly tied to European hides will face further difficulties in making the figures stack up.

On a world scale, though the missing volumes in Europe are easily being made up the traditionally high slaughter numbers in the USA, the situation of the European leather trade remains as parlous as ever. Hide prices in general appear strongly driven by top quality and extra heavy hides. In addition to the general decline of the summer kill, hide and leather producers are now being faced with a strong decline in slaughter weights. Coinciding with this is the steady-to-good demand from speciality tanners serving the luxury goods, automotive and high-end furniture manufacturers - and for whom the temptation to ramp up prices must surely be strong.

The fact remains, however, that quite a significant proportion of hide production must still be marketed in the medium and low-end leather sectors and as such, it must be capable of competing at international price levels. Against this backdrop, two likely scenarios emerge. Either we are going to see an across-the-board decline in prices or a widening of the spread between heavy/good hides and the remainder. Nevertheless, the fact that standard grades of European hides are far less susceptible to wide disparities of this kind than their counterparts in other parts of the world means the development of prices is far more uniform.

What else of general interest is there to report? All our sources report a slowdown in shipments and incoming LC’s from Asia. Regular readers will known we have always believed future prices will be determined strongly by this region and the current level of activity would seem to support this hypothesis. Although the leather business has a short memory, many are likely to recall the sharp correction in hide prices that occurred during the summer of 2001.

While it is true that the rise in raw material prices in the first six months in 2001 were bigger than those seen today, and their causes were different, several pertinent observations can be made.

Last year, hide purchasing was largely based on supply and production security. As a result, we have less inventory this year. However, there is now a very strong correlation between purchasing and prices due to the positive outlook for world consumer spending in the second half of 2002. As a consequence, many production budgets and purchasing strategies that are in place now were based on this positive anticipation.

As was also the case last year, there appears to be a large number of outstanding sales in the USA. But is there? Because not for the first time, many in the trade are questioning the accuracy of these reports. And with good reason. Because if they do turn out to be false, those who have based their calculations on them could easily find themselves wrong-footed.

With this evidence at our disposal, we believe the market is not in a process of collapse like that seen last year, but a state of correction. This can be seen in:

1. The significantly lower average price level and;
2. The solid price calculations being made by Asian tanners. Price correction in the US market might therefore be expected to be moderate and could be only exaggerated by market emotions.

The situation for the European markets is significantly more dangerous. One has to consider that the euro has gained more than 13 % over the past three months. At the same time, prices in euros have been on the up and up. European hide prices have been on the move too, escalating rapidly from an undervalued situation in the first quarter to the current situation where they are overvalued, with the upward trend being fuelled by rising prices in both the Europe and in the US. With the exception of quality and heavy grades (s.a.), which appear very well cushioned, hides are overvalued to the extent that they could hit 20-25 % more than their real value soon.

It is this that is fuelling the pressure that we are the European marketplace and which threatens to turn from boom to bust. At least we are in the low season of leather production and business activity, which means we have the breathing space we need to make better judgements for the future. It is to be hoped the market takes advantage of this opportunity and handles the necessary correction in a professional manner. As we have seen many times in the past, a sudden simple market reaction is sometimes all it takes to trigger a much deeper and more widespread price movement.

In addition to simple issues of supply and demand, when speaking of the supply chain one must always be mindful of the importance of cash flow. This is especially relevant at the moment due to the turbulence seen in the financial markets. Restrictive bank policies combined with fewer opportunities to obtain external finance in the Western Hemisphere are conflicting with higher raw material prices. Complicating the picture still further is the globalisation process. Against this unsettled backdrop, it is perhaps unsurprising that cash flow management has become the fraught business that it now is - especially where extended supply chains are concerned. The summer period has always been critical in this respect, though falling shipments and revenues during the period are no longer seen as the obstacle to trade in Europe that they once were.

So, let’s hope for the summer of 2002 that US consumers continue their high levels of spending, despite the general economical uncertainty, so that shelves have to be regularly replenished. If the current upward trend in consumer spending in Asia continues as well, potential problems in other parts of the world could be compensated.

However, businesses are in the business of remaining profitable and with the US market having only made part of the correction it so evidently needs to, it can be assumed that hide prices will start to soften in sympathy. And when it does, this will be to the trade’s benefit, allowing the production cycle from September onwards to get under way cleanly, unfettered by inflated raw material prices.

The World Cup now is over and Brazilian technical prowess beat German minimalism. The best team won the tournament! Now, the Northern Hemisphere can enter the vacation season, ready to emerge refreshed for the challenges that lie ahead in the second half of the year. However, we will continue to monitor the leather pipeline in the interim. So even if you are on holiday in two week’s time, remember to pay us your regular visit. Who said you can’t mix business with pleasure?

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