With the Christmas and New Year holidays now almost upon us, this will be the last issue of Market Intelligence for 2002. The next edition will be published on Monday 13.01.03. So please make a date in your diary to return to this section then!

With most of the world now winding down for Christmas and the Lunar New Year break, the financial markets did not yield any significant developments during the period under review (December 3-16). Having previously rallied, the stock markets fell back into their old uncertain ways while other economic indicators provided few pointers for 2003. In general, indicators for the USA showed a more positive outlook than for Europe and Japan, though the overall picture remains clouded in uncertainty.

Rumours that the OPEC nations would cut oil production even in the absence of a war with Iraq proved unfounded, meaning one can expect oil to continue to trade at around the $25 a barrel mark, at least for the time being. And though interest rates came down in Europe, the private banks have so far refrained from passing the reductions on to their customers. Germany continues to be the lame duck of Europe, and the government appears to have no idea of how to get the EU’s largest economy out of its current mired state.

A sea change in US economic policy was signalled by the replacement of PaulO’Neill as Treasury Secretary by John W. Snow and President Bush's appointment of the Wall Street banker Stephen Friedman as his top economic adviser.   Most analysts think this will lead to higher budget deficits and that it might also herald the abandonment of the US administration’s policy of maintaining a strong dollar. If this is the case, then it is bad news for European and Japanese exporters. In reaction to the move, the $ fell to a two year low against the euro, having lost a total of 10% of its value in relation to the European currency during 2002.

The biggest danger to the world economy is now the looming war with Iraq. If conflict does break out, then the world will change a great deal, and not for the better. Despite the rhetoric, the fact remains that the threat of international terrorism cannot be fought through a conventional war. Global security will suffer and so most likely will business activity - at least for a while.

Oil prices will certainly rise and the cost of the military operation will inevitably impact on the US budget deficit. We could see a complete destabilisation of the world economy or a short-lived boom in the USA followed by a period of inflation and a then a sharp economic downturn. So, apart from the political question, very little that is positive can be expected from such an attack. In terms of the human cost, it is to be hoped that even at this late stage, war can still be averted.

Before we review the current year and preview the next, let us quickly review the markets of the past two weeks. Essentially, everything went more or less according to expectations with trading activity falling to the necessary minimum as tanners either bought according to their regular programmes or covered their ultimate needs for January.

In Europe, most business was related to the renewal of regular buying programmes. Here, tanners wasted little time in taking price advantage of both the upcoming holiday period and overabundance of male hides. Consequently, sellers’ margins on male hides were further eroded as prices corrected by a further 5%.

The consensus among European suppliers in Europe is that the surplus seen in bulls and steers is unlikely to last beyond the end of January. This is because it was largely driven by farmers seeking to take advantage of the current reasonable prices, as well as the EU per-head subsidy scheme, which expires at the end of the calendar year. If this is the case, then we can expect the supply wave generated by the surplus to roll out during the second half of January, before undersupply sets back in. Because of the seasonal slaughter decline seen during the carnival holiday period, the kill should remain quite low throughout February.

In America, we saw the moderate erosion of male cattle prices. So the rally seen at the end of the last period turned out to be very short lived, having been just a short covering operation of the market. Looking at US export sales over the past few weeks, we can see that levels have not been very impressive and could even be described as insufficient in relation to the market’s need for hides.

China showed substantially reduced interest in steer hides, confirming the rumours that the shoe leather business in that country is much slower than it should be. So, we saw steer prices fall again, returning to a trading range of between $60 and $65 - the floor for hide prices for the whole of 2002. The only possible exception is HNS, which have consistently maintained their values around the $70 mark, due mainly to constant demand from automotive tanners.

The market situation was significantly better for female hides and in particular for dairy cows. Furniture upholstery tanners - whether in Europe or in China – would appear to have quite reasonable order books on their hands and have therefore been especially active in buying this product in the past few weeks. Demand is also nicely divided between Asia and Europe. While the European tanners have concentrated for some time on the heavier material, the Asian tanners have been more focused on yield, hence their greater interest in lighter weight hides. So production in Europe could reasonably said to be well distributed between these two origins. Another impressive development was the way in which furniture tanners in Asia almost completely absorbed dairy cow hides, which were always previously regarded as the sole preserve of the garment tanners.

The situation in the bovine garment tanning industry by contrast remains grim and we understand that only a handful of tanners in Korea are still active in the production of garment leathers. All other tanneries have either shifted their production to China or simply gone out of business. In any case - and as has been reflected in previous issues of Market Intelligence - the production of garment leather in the last year has declined significantly. In the absence of reliable figures, we would not be surprised if output dropped by 30 % during the year.

Prices for cows during the period held out and more than one supplier has reported that they are now looking at increase on the lows seen at the beginning of November by up to 5%. Many sellers also give the impression that they were already fairly well sold forward into 2003. Against the backdrop of a generally declining kill therefore, it would be reasonable to assume that prices will rise rather than fall.

The gulf between the price of cow and heifer hides is no real surprise. Analysing the spreads between males and females for 2002, it can be seen that a large discrepancy had been in place for quite some time. For a while at least, this was justified by strong demand from automotive and high quality shoe leather tanners for males and the limited supply situation. But with the recent stabilisation in supply and demand, hide prices are returning to their normal differences.

The sheep skin market did not deliver any major activity or news. Those who had hoped the severe and early winter in Russia would lead to another round of short term raw material buying were in for a disappointment. In the event, the reverse was true as high stocks built up in Türkiye and finished or crust skins waited to find buyers. Consequently, prices did not change very much while the pressure on double face lambs persisted.

The split market remained steady as constant demand prevented prices from falling. However, declining raw material prices and the improving availability of cheap hides will sooner or later have an effect in this market. The situation can be likened to that which prevailed in the hide market in the summer 2002, when prices took three months to correct in line with world leather prices. We would therefore expect split prices to moderately erode in the first quarter in 2003, bearing in mind the weaker US dollar is likely to bolster prices quoted in the currency. As ever, currency exchange issues can be expected to play a pivotal role.

The year 2002 can be neatly categorised into two different parts with the situation in the first nine months being characterised by insufficient supplies and strong demand – particularly from Chinese shoe tanners and the automotive tanners. And while garment interest declined during this period, those losses that did occur were balanced by gains in furniture leather in the US. The outcome of this was the sharp rise seen in prices seen during second quarter – a development that caught out a number of tanners in their price calculations.

In the second part of the year, (i.e. the last four months), we saw supplies pick up. However, tanners became more cautious in their purchasing as buying slowed in sympathy with the gloomier global outlook. As a result, the price corrections that we predicted in our Market Intelligence reports at the end of the summer came to pass. The effects of currency fluctuations during the same period were no less profound as the dollar lost 5-7 % of its value in relation to the euro. As a result of this and other factors, the net value of many hide types corrected by up to 20%. This restored profitability levels for the leather pipeline – something that has definitely been required for some time.

So what can expect in the first quarter of 2003? Political uncertainties apart, under normal circumstances we would expect to see the market remain stable until end of January. But there might still be room for corrections in US and Australian prices, given the current competitiveness of their European counterparts.

In the second half of January we could enter a critical period. If we see a strong interest before the end of January then prices are likely to firm up sooner rather than later. However, a great deal depends on the Asian tanners. It they postpone purchasing activity into February we are likely to see a further four weeks of market stability. But if they start buying in serious volumes in the meantime, things could become a lot more volatile. Christmas sales and buying decisions taken in the automotive industry are also likely to exert an influence, as is the pattern of buying among European tanners.

So there is a fair chance the market will remain stable until the next Market Intelligence in mid January. At the very least, it is to be hoped that any kind of volatility can be put off until the end of February. If things remain stable, it would mean a profitable and successful first quarter for most tanners, while providing a stable platform for development for the remainder of the year.

In the meantime, we would reiterate our concern surrounding the financial state of a number of European tanners, as hide sellers continue to report cancellations or reductions in their credit cover, as well as late payments. The financing policies of the European banks are changing rapidly to the disadvantage of medium sized capital intensive businesses. On top of the structural problems currently facing the western European tanning industry, this can only add impetus to the processes of relocation and consolidation already being seen within the sector. This is likely to be accelerated by the deflationary trend world wide, which is compelling many businesses to become bigger to protect against cost and price pressures.

We wish all our readers a peaceful and happy Christmas season and a happy New Year. We hope that you and many others will enjoy the reading of the MI also in 2003. We would like to welcome you again to share with us critical opinions and comments and also all kind of input is always appreciated.

Wishing you a Merry Christmas and a Happy New Year!