Macroeconomics

First of all we would like wish all our readers a very Happy New Year!

Of all the events of the past four weeks, in our view, the most significant was the sharp rise in oil prices, brought about by political and labour unrest in Venezuela. The barrel price shot up to well over $30.00 and is currently hovering around the $30.00 mark.  Though OPEC says it expects the situation to settle, in the meantime prices can be expected to remain above the $25.00 average to the detriment of most people’s energy bills. The worst affected are likely to businesses and households in the north of Europe and the Eastern bloc, where temperatures are currently at arctic levels.  One of the few winners is likely to be the Russian economy, on the back of stronger oil export prices.

Economic indicators were mixed and in the larger Western economies more negative than positive. A particular disappointment was the 4.6 point drop seen in the in US consumer confidence index to 80.3 during December while analysts lowered their expectations for growth in the euro zone to no more than 1 % in 2003.

The uncertain outlook and upcoming elections forced George Bush to propose a $645 billion tax cut programme for the coming 10 years to stimulate private consumption. Reaction was mixed as many national and international experts raised their eyebrows concerning the rising budget deficit.   Indeed one has to ask if the US is heading for a debt crisis in the coming years, given the current level of overspending by US consumers.  In any event, it can be seen as attempt to pre-empt deflation, as opposed to fighting it once the process has begun.

Together with the shadow of war in Iraq and tensions surrounding North Korea, these factors weighed heavily on the dollar, though less on the euro and the yen, with the euro reaching a three year high against the dollar and passing the $1.05 mark on several occasions.

At this point, we would draw our readers’ attention to currency issues raised in previous editions of Market Intelligence, as these have always had a greater influence on raw material prices than internal market factors.  With this in mind, it is instructive to observe that the dollar lost around 17 % of its value against the euro in 2002 and about 10 % compared with the Yen.

Market Intelligence

In that most hide processors, tanners and producers of leather products were shut down over the Christmas and New Year season, the year has yet to get under way in real terms.  In the run up to the holiday season, however, some activity was noted among Asian tanners who were trying to buy material for delivery before the shutdown.

Nevertheless, trading volume has been light, as evidenced by reports from European suppliers and American exports statistics. Most suppliers reported some shipping activity and less about new business, with a rise in activity being seen towards the end of last week.  Prices changed only moderately while variations were more currency related than a product of active buying and selling.

Other markets such as sheep and lamb skins were almost idle – the only difference being that in many grades there was sufficient supply, prompting sellers to lower their asking prices in the hope of stimulating demand. They were far too late in doing so however as the double-face season had already come to an end.  New directions and stimulation for the next season therefore cannot be expected before the beginning of this year.

The Istanbul Leather Fair was much more active than one might have expected, with lots to see and plenty of variation in terms of the size and scope of the exhibitors.  Attendance was high with most tanners declaring themselves quite happy with business levels in 2002 and their prospects for 2003.

Quality and fashion was of a high order and it was evident that the Turkish leather industry is rapidly catching up with Italy and Spain. The Iraq situation cast less of a shadow than one might have expected.  This might be explained by the fact that the garment industry is between seasons. With production not expected to restart before April, the hope was that any conflict will be over by then.  However, some nervousness was evident among the garment makers, many of whom rely heavily on sales from the southern Turkish holiday resorts.

It was further hoped that the cold winter conditions in northern and eastern Europe would see a run on double face coats, resulting in either some reorders or at least dramatically reduced inventories in time for winter 2003/04.

Turning to the wider marketplace, the split market continues to see reasonably low levels of production and reduced forward positions from tanners and producers in general. However, prices have not changed very much for the same reasons we have already mentioned for hides.

We have always been of the opinion that the first quarter of 2003 would be more supply driven than the last quarter of 2002. Although better statistical knowledge will have become available by the next issue, in Europe everything is currently pointing to a significantly lower kill while expectations are likewise not too high in the southern hemisphere and in the US.

To determine how the demand side will unfold, we will have to wait for all the market players to return after the break and most in Europe and Asia will have resumed their production in full by the beginning of this week. Last week, most producers were focused on getting production back on track as apposed to worrying about their raw material procurement.  By the end of the week, however, more activity was seen and some sizable sales reported from various origins. In our view, the coming two weeks will now finally determine the trend for the rest of the first quarter. Despite of the disappointing Christmas sales picture worldwide, we believe that tanners and leather manufacturers have reduced their inventories significantly and that their outstanding raw material purchasing position should be dramatically reduced.  

This is the outcome of the uncertain business outlook as well as the successful attempts made to drive raw material prices back to profitable levels and - in Europe at least - to keep inventories low at the end of the fiscal year.

Under normal circumstances the industry is now entering one of its busiest production periods in the run up to the summer and needs at least a moderate increase of the product flow in the pipeline.

By keeping non dollar prices under control, the weakening dollar meanwhile can be expected to reduce the current price pressure on US hides.  The threat of war not withstanding, we foresee a steady market over the next few weeks with a firmer trend taking shape towards the end of the month.  In two week’s time, however, we will be better positioned to know where we go next.  

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