The previous two weeks were full of excitement as far as the financial markets were concerned. The review period opened with a continuation of the slide that started in the previous two weeks (October 7-21) as prices hit new lows and analysts tried to outdo each other with their negative forecasts. But just when all hope was lost the situation began to turn. Indeed, last week, the markets positively rallied so that now, things are more settled than they have been for some time. However, we are nowhere near yet out of the woods as the banks, pension funds, insurers and private investors are all continuing to suffer severe losses.

Some interesting data was released – most of it going against the generally positive mood of the markets. In the US, the closely watched consumer confidence index crashed from 86.1 to 80.4 points while the retail sales figures for September showed a 1.2 % decline. In August, real income edged up by a mere by 0.7 % while the US trade deficit rose to a record $38.46 billion – the latter figure being a particular cause for concern among some economists. One cannot help but wonder how this huge and ever rising figure is going to be financed in the long term.

On the other side of the Atlantic, the bullishness surrounding the euro was deflated somewhat by the realisation that the big economies of Germany, France and Italy were unlikely to meet the EU targets set for their budget deficits in 2003. All three countries also released lower than expected industrial output figures. As ever, it was left to China to deliver the good news. Its GDP rose 8.1 % for the third quarter - strong exports being the main driver. The currency markets were again generally stable with only a slight weakness being exhibited by the euro.

For as long as anyone can remember, the world hide market has worked as a single entity, with price rises or falls in one part of the world having a knock-on effect on another. With the arrival of the information age and the World Wide Web, one might have expected this process to accelerate, but in fact it’s gone into reverse. Though our expectation of further price consolidation was correct, the way in which this happened was far different from what we envisaged. While prices in continental Europe, the USA and Australia declined only moderately, in England and Ireland they plummeted. It served to illustrate just how supply-driven the market has become and how localised, seasonal factors can exert just as much pressure on prices as rational trading policies.

The situation in England and Ireland was especially noteworthy. Here, the increased seasonal slaughter led to an immediate need-to-sell, with those abattoirs that in recent years had started to market their hides being especially caught up in the panic. Being neither willing nor able to buffer the temporary overproduction they became extremely active in their selling. But with the English tanneries and Irish blueing plants being in the state that they are, in the end these sellers had no choice but to dispose of their excess via customers in Italy and Spain – precisely the two European markets least likely to be affected by non-rational buying decisions. The result was a price drop of up to 10%, with heavier selections being especially badly hit. If this situation continues over the next two weeks, supplies of other European origins are likely to follow suit.

The picture was much more stable in the rest of Europe as the increased seasonal kill kept the lid of prices. The sense of crisis that previously infused the tanners’ buying mainstream raw materials also slackened. As there was no significant surplus of hides in these markets, prices fell only marginally. Against the backdrop of an increased kill in Europe and steady kills in the other markets, it was apparent that leather business had improved - despite all the worries and concerns that we ourselves had voiced in the recent past. Demand for leather and leather products would appear not to be in a state of decline after all. We would however repeat our opinion that the industry is undergoing a process of structural change and a geographical shift of production (see previous reports).

Meanwhile, back in the USA, the longshoremen’s dispute that brought the West Coast ports to a standstill for 10 days was brought to an end by the President’s intervention - at for the time being. The warring factions are now legally bound to keep the ports open for a period of 80 days from last Tuesday, (October 15), at the end of which a strike vote can be taken.

The effects of this action on the supply pipeline were there for all to see in Nike’s warning that it was likely to impact on both deliveries and revenues. If one takes Nike as a barometer for the whole of the industry, then one can see that worst effects are likely to hit home around Christmas.

What else has happened in the past weeks? As far as the trade was concerned, there were no major events, though the headlines were inevitably dominated by the terrorist outrage in Bali. The human tragedy notwithstanding, a presumed outcome might be an increase in retail spending in the Western World, as consumers choose to stay close to home.

Though in Europe, leather orders were late in arriving, they nevertheless picked up slowly but surely - most being placements by tanners who needed to cover their needs to the end of the season. They also mainly concerned special finished articles, causing a few headaches for those producers who were asked to fill them.

As far as individual segments of production were concerned, in Europe it was the medium and higher quality business that enjoyed the strongest demand. Sentiment here was buoyed by the continued rise in consumer spending in Russia and the CIS (Commonwealth of Independent States – the former Soviet Bloc) and is presumably the outcome of continued political stability and oil prices being higher than they have been for some time. Indeed, many large brand names and retailers now see Russia and its satellites as being the market with the best short-term growth prospects. Many Chinese manufacturers have also latched on to the potential of the Russian market, opening wholesale and retail centres there across a broad range of consumer goods.

It is also interesting to note the increasing stake being taken by the Chinese in distribution chains serving in the Western markets. Chinese car manufacturers buying a stake in the automotive arm of Korea’s Daewoo, Hutchinsons of Hong Kong buying the Dutch drugstore chain Kruidvat and TLC of Taiwan purchasing Schneider Electronics - all of these are examples of the Chinese are now waking up to the attractive margins inherent in distribution.

Considering the difference between how much a brand name shoe sells ex-factory in China and how much it fetches in midtown Manhattan or Paris, one can readily understand the attraction. Indeed, it would be no surprise if this trend took hold in the leather industry, with brand names or retailers of leather products falling back under the control of the manufacturers. It is not only the margins that are so attractive. By having control over the logistics and material management process, pricing and model strategies, manufacturers are not only able to avail themselves of more profit opportunities, they can also better to control their costs – just as the likes of Natuzzi and Ecco have already done.

What did the other raw materials do in the meantime? Splits remained in tight supply and consequently prices for specific and selected items continued to rise. We would consider split prices - except heavy suede articles – have now reached dangerous price levels – especially so considering many hide types are priced more attractively than splits or coated splits.

The way we see it, most split tanners now buying to finish their existing order books and have yet to decide what they are going to offer next season. For the time being, with price levels for standard splits being as high as they are, it is extremely difficult for them to turn in a profit. Lineapelle in Bologna which begins early next month should offer some clues as to the direction in which the market is headed and whether or not splits will be in strong demand next season. We take the view that split prices, which are extremely cyclical, will need to be ahead of the price correction when it occurs.

Lamb and sheepskins continue to struggle. The end of the double-face season is fast approaching and by mid-December most production will have switched to the nappa for spring and summer. Most double face manufacturers would appear to have their production needs fairly well covered. Only an early and cold winter in the key markets of Russia and China, combined with decent retail demand, could initiate another round of lambskin buying and clean up what remains in the hand of the producers.

Most interest at present is for cheaper lining types or preparatory buying for nappa production. It has to be said that the spread between double face and nappa skins has widened too much for our liking over the last season. Without a strong recovery in the demand for double face, it can reasonably be expected that double face skins will decline while nappa skins will remain stable.

So, what is our traditional outlook for the coming weeks? We see no reason why we should depart from the trading range set out in the previous editions. Though the pressure on hide prices is likely to persist in the short term, the lack of concern about the demand for hides among packers and processors means the efforts made by tanners to force hide prices down to increase their profitability has met with little success.

The European situation notwithstanding, sellers still feel quite comfortable to take a strong position and a great deal will now depend on the outcome of the Highpoint furniture and Bologna fairs. These shows will indicate the general levels of demand and the fashion trends, which of course have a bearing on price structures.

For the coming weeks we believe that if movement in the marketplace occurs at all, it will be downward rather than up. Whatever happens, changes will be limited in their scope as the industry waits for the traditional early November period to determine what the trend for the next quarter will be.

The economic fall out from the continuing terrorist attacks should also not be underestimated. Far-reaching military decisions have yet to be taken and the financial markets will continue to remain vulnerable.

Subject these macroeconomic factors, prudent and selective purchasing of raw materials in the next week could be a wise decision, if one is not to be caught out by a surprise upturn in the demand for leather.