Macroeconomics

Of the economic indicators that were released during the period under review (November 8-22), virtually all were pessimistic – at least as far as the western world was concerned.

In the US, the uncertain outlook was underlined by the 50 base point cut seen in interest rates, bringing them to their lowest level of the past 41 years, plus the fall in the closely-monitored Institute of Supply Management (ISM) index to 48.5 points in October. In Germany, the ZEW index also headed South, while the EU Commission’s growth expectations for 2003 were downwardly revised from 2.9% to 1.8%. The only exception to the gloom was the University of Michigan’s consumer confidence index that rose 4.4 points to 85 index points.

Rather more predictably, the Mainland China economy continued on its upward trajectory, displaying a 14.2% increase in industrial output compared with the previous 12 months. Since most of this growth related to exports, the gains were presumably made at the expense of the US trade deficit. Meanwhile, following Saddam Hussein’s decision to let in the UN inspectors, oil prices fell to the low 20s - good news for the countries of the Northern hemisphere before the winter. However, this is only likely to last for as long as no problems are encountered with the inspections, which probably means not very long at all.

Market Intelligence

Against such a downbeat economic background, nobody was expecting this November’s Bologna to be a record breaker. Despite this, the mood was quite positive, even if the trend for visitors to limit their attendance to the second day was was strengthened, with the aisles being relatively quiet on the first and last days. Presumably, the staging of the adjacent Tanning Tech machinery show helped boost numbers of the second and third days.

This imbalance was a particular frustration for the exhibitors, who found themselves overwhelmed on the second day as both their prospective buyers and raw materials suppliers vied for their time and exhibition stand space. Consequently, loud complaints were heard of late or broken appointments, too little time for meaningful discussion, and prospective buyers being squeezed off stands by suppliers. The lesson here should be that despite the difficulties in booking hotel accommodation, one day at the show is not enough.

Among the raw materials suppliers, as ever, there was the usual round of inflated claims, both in terms of the volume of hides and skins sold and the prices realised. But it would be fair to say that the low expectations of most were exceeded.

One has to wonder what happened to bring about this dramatic reversal in sentiment, from negative to positive. One suspects that it was simply the willingness of the tanners to buy hides in decent volumes.  This development of the first two days was another classic example how emotional factors can influence the raw materials markets, and the extent to which mindsets can be influenced in such a short space of time, for no particular reason. The exception were the UK wet blue cow producers who, in a flurry of panic, decided to take up to 7% less for their hides against the prices that had been valid as recently as the previous Monday. But there again, they also seemed to be pretty nicely cleaned up by the Wednesday afternoon.

As our regular readers will know, this pattern of buying activity was in line with our expectations, making the apparent surprise of the raw materials sellers at the end of the show all the more difficult to understand.

What happened in the rest of the world? Not too much really, as most markets continued their orderly retreat and softened slightly during the fair. Many people were concerned about the continuing slow interest from Asia and there were some raised eyebrows about the low levels of interest in hides from China, which has been a major driving force for such a long time. The continuing downturn in the bovine garment business was cited by some, but there again this is hardly anything new.

As far as fashion pointers were concerned, Bologna provided few surprises.  What was a surprise however was that in shoe and leather goods - probably the major part of the show - we found it extremely difficult to find anything really new. We had expected more artificial grains to be displayed and that prints and artificial designs would be well represented, but this appeared not to be the case. As ever, good quality nappas dominated the proceedings. In furniture, there was much talk of a return to pure aniline leathers, of issues of touch and feel, as well as the appearance of heavier and flat types with a touch more vegetable in the finished character. The impression gained was that natural and vegetable tannage was once more in the ascendance- good news for the beauty of the product. However, the fact that it requires quality hides means tanners’ lives are unlikely to become any easier in the foreseeable future

So, what are the conclusions that can be drawn from the fair? As outsiders - as we are - who watch the industry and are not involved in the manufacture or sale of products, we were impressed by the positive undertone present on many stands.

In fact, in a trade known for its frequent melancholy, we were extremely surprised. As we all know, tanners who do not complain about raw material suppliers and their prices, about their customers who ask for too much, or about the end being nigh, are extremely rare on the ground. Given the present state of the global economy, therefore, one might have expected the mood to be gloomier than it actually was. As it was, there was no shortage of tanners prepared to speak openly about their plans for expansion, about customers who were looking for new products and inspirations and about their business opportunities in 2003. Complaints about insufficient orders and prices, if not absent, were largely backgrounded.

We also noted a strong underlying interest to find more, young and/or highly qualified managers. Not only in terms of technical personnel, but also in the commercial departments. On more than one occasion, regrets were expressed that that not enough in-house education has been carried out in the past decade. The fact that many companies preferred not to talk about this as a subject would appear to underline its sensitivity.

The need for more, qualified managers is directly linked to the globalisation of the bigger players in the leather industry and the growing need for professionals who are qualified to structure and manage international operations. Of course, the leather industry is not alone in having this need. in that it is a relative latecomer to the concept of globalisation, however, and most of the international trading houses went out of business in the late 1980s, the fact remains very few people in the trade have these skills - the only exception being those with a background in the chemicals sector.

In the past 10 years, many companies have remained essentially locally based operations that are now finding themselves in the position of having to find more qualified staff from outside of the trade. Given that these people must also have leather industry skills, this could obviously be viewed as something of a problem. If one wishes to draw another conclusion from Bologna then it was the confirmation that the big and global companies, as well as the highly specialised niche players, are continuing to benefit from the present market trend – a subject we have covered in depth in previous editions of Market Intelligence.

What else happened during the period, and how did the trade digest Bologna in the following week? The positive cycle in the demand for splits persisted. Demand remained strong and those tanners who once more found themselves short of material  due to lack of supply had no option but to pay the sellers’ asking prices, with hides leather belts, suedes and automobile interiors being in particularly fast movers.

Even so, we maintain our position that against the current backdrop in the downward price correction for bovine hides and the increase seen in the supply of splits, the price for splits is exaggerated. As a result, we believe the material will fall from favour with many users of split leather or even the tanners themselves. Regardless of how one views these materials, at the very least one has to accept that the strong demand for splits is evidence of the continuing high levels of demand for leather products in general.

The sheep and lamb skin business was not so much the focus of interest in the past week. The double face season is now rapidly coming to an end, which means the trade for double face lambs has slowed considerably. Prices did not change very much but if they did, they moderately declined. We heard of strong interest for lower priced nappa skins, both from Turkish and Chinese buyers, who were evidently monitoring the markets closely for available materials. As a consequence, prices for this type of material firmed slightly.

What did the hide market do the days after Bologna? All our sources report a reasonably quiet week afterwards with most people being in agreement that as far as the European tanning sector is concerned, 2002 is already over. All that remains of significance is the round of abattoir buying at the end of November which is widely seen as influencing the beginning of 2003, plus another Zurich auction.

The American and Australasian producers by contrast are now focussed on the first half of December when their top Asian accounts make major decisions on their hiderequirements for the first quarter 2003. With the exception of bovine garments, which for the coming seasons appear to be losing more and more attraction and market, there is little reason to believe that demand will decline, except in the breaks created by the New Year holidays. Demand for bovine leather will certainly not be helped by classical leather jacket falling out of fashion in the dominating markets of China and Russia.

The next eight to ten weeks will see a marked reduction in the kill in many parts of the world. Christmas holidays in the Southern Hemisphere, Thanksgiving and climatic reasons will all conspire to reduce the availability of raw material while seasonal factors in Europe and Asia will reduce leather production, with the decline in slaughter being greater than the reduction in leather production. Consequently, we maintain our position that the markets are in their final round of price correction. Not all hide types and origins will react at the same time or to the same extent. It could well be that the bovine hides  that are predominantly used for bovine garment productions, or other grades that are out of fashion at the moment, might still see some pressure. But the mainstream article as used by the large producers should stabilise reasonably soon.

The fact remains however, that we are still in a period of massive uncertainty. The larger world economies still look extremely vulnerable and the political situation is far from predictable. So there are a lot of unknown variables out there. But entrepreneurs and managers do not have the luxury of closing their factories because of this. They must plan ahead and keep their production running – activities which are helped immeasurably by management information of the type provided by Market Intelligence.

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