How the received wisdom of the marketplace no longer holds true
Macroeconomics
After the excitement of the previous weeks, things were more settled during the period under review. Of the usual round of financial data, nothing really stood out and any changes that did occur were only small.
The outlook for the world economy remains gloomy and many of the 'experts' who until recently were trying to talk the situation up have revised their outlook accordingly. (On this basis, it would not be a surprise if things started to pick up again, but that's economists for you!).
The stock markets were more settled, rallying quite decently from the lows seen early August. Interest rates meanwhile remained settled in both the euro zone and the USA.
Probably the most important factor was the series of weather catastrophes seen around the globe. China, Argentina and South Eastern Europe plus Germany all suffered severe floods and the impact on the local retail and investment climates is
likely to be significant. The Euro also weakened against most forecasts, making European exports once more attractive.
Market Intelligence
It wasn't just the financial markets that were very quiet. So too was the hide and skin world. While the European holiday season continued, the USA and other markets were much less exciting than in the previous weeks. All things being equal, one might have expected this to result in falling prices. But what we saw was quite the opposite.
While US prices remained at the upper end of our expectations, those in Europe held steady with lighter weight material that had been difficult to shift at the beginning of the holiday season being absorbed very nicely, leading to the market entering a period of almost perfect equilibrium.
Interest
Our European sources report of a two-sided market, with one not showing much interest - having previously covered its immediate needs for September - and the other entering the holiday season with a minimum level of inventory and hopes for lower prices after the return.
Generally, we would have agreed with the latter group - at least at the beginning of June. However, the extent of the downward correction we expected for the summer months was never fully realised. Prices were also kept buoyant by the effect of continued trading in Asia and the fluctuations seen in the dollar. The upshot was that in many cases, we are now back to where we were at the beginning of the holiday season.
So their hopes to improve their margins through lower raw material prices have been dashed with a decent number returning to their desks and calling their regular suppliers for short term deliveries and contract schedules. This has been limited to isolated customers-supplier relations and is not generally widespread - at least so far.
Unsettled
Looking more closely at the intelligence of the past couple of weeks, it is clear that the traditional global pattern of raw material flow is becoming more and more unsettled. While US hides saw higher levels of interest from Europe, European hides meanwhile were being shipped in rising volume to unusual destinations such as South America. The South Africa-based automotive tanners also entered the bidding for European hides.
Apart from simple reasons of quantity, a causal factor behind this trend was the greater stability seen in selections of finished leather. The rising demand for higher quality leathers generally is forcing tanners worldwide to vary and expand their raw material sources.
Tanners located in what were traditionally seen as the low price, low quality regions of the world are increasing competing for the better raw materials, to balance their
selections. Tanners in the higher price and higher quality regions meanwhile are increasingly finding themselves in the position of bidding for cheaper raw materials to reduce their average raw material costs - the very scenario we predicted during the first half of the year.
This trend is symptomatic of process of globalisation that is taking place in the wider world and is certainly a result of the total transparency of prices. As any regular traveller will tell you - niche products apart - the difference in price for the same finished product in different parts of the developed world is becoming narrower all the time. Only the specialty orfashion brands will be able to set themselves apart from this process - a hypothesis supported by an American friend who tells us that mainstream retailers are increasingly fighting shy of selling the highest priced top end brands. Further evidence is provided by the fact that low price hides are still not selling very well and (surprisingly) not following their medium and high price counterparts. In volume production terms, they are increasingly being seen
as substitute material.
Let's now take our customary brief look at the other raw material markets, which will briefer than normal with this edition because of the low levels of activity seen. Though quality splits remained in short supply, attempts to take advantage of this largely fell on stony ground because of the holiday season, with only marginal increases being achieved here and there.
In Europe, lamb skins suitable for doubleface enjoyed early and good demand and prices rose by about 5 % in August so far. Though sheep skins suitable for nappa have had a tough time in the last three months or so, our contacts are now expecting an improved business climate in September, citing the combined effect of reduced supplies, lower than usual levels of quality from the southern hemisphere and low inventories. So the lowest prices for nappa skins might already have been seen in Europe during August.
So where do we go from here? Well, depending on which economist you listen to, either we are going to be in for a grim time in the second half or the world economy has already started to recover. Balanced against this however, is the continuing high level of consumer confidence in USA, UK and Asia - confidence that has kept demand bubbling along and which doesn't seem to be influenced unduly by what the economists have to say, dollar fluctuations or share prices.
With these forces at work, we still find it too early to decide for a final judgement for the situation and we kindly ask our readers for some more weeks of patience until we finally dare to decide either way.
