Macroeconomics

The last two weeks saw an explosion of activity the like of which we had not seen for some time.

While the world was waiting for the outbreak of war, the stock markets tumbled and the US dollar fell back further.  But the big surprise was the price of oil price which, instead of breaching the $40.00 barrier actually fell to below the $30.00 a barrel mark.  The picture became even stranger when the invasion began last week.  No sooner had the tanks begun to roll than the stock markets rallied, the dollar made solid gains while oil prices fell as low as $26.00 a barrel.  Stocks and share values meanwhile appeared to pay no heed to the outbreak of war.

It would appear that the world is now betting on a quick and successful resolution to the invasion of Iraq and consequently on lower oil prices. But even if the coalition invasion goes according to plan (and there are obviously no guarantees that it will) this might still be seen as too optimistic given the state of the Western world economy.

As ever, the economic outlook was highly dependent on where you are located in the world.  Despite the rising stock markets, American consumers remained pessimistic, as reflected by US consumer confidence index which plummeted 4.9 points to 75 points in March.  The Chapter 11 filing by the US retailer and mail order specialist, Spiegel, caused by massive bad loans in their financing branch, only served to heighten concerns that the US consumer might be overspent.

On other fronts, Ford and GM cut their production plans for the second quarter by almost 20 % due to high inventories and limited hopes for car sales in the second quarter. Germany reported record bankruptcies for 2002 and an even higher number are expected for 2003. Anyone hoping for signs of reform in last Friday’s speech by Chancellor Schröder were likely to have been disappointed, as he had nothing new or meaningful to say.  Consequently, hopes that the German economy might somehow begin to find its way out of the mess it is currently in, pulling the rest of Continental Europe along behind it, are now receding.

As ever these days, the best economic news came from Asia. China again posted impressive figures as industrial production rose by almost 20 % in 2002 while GDP for 2003 was put at around 8 %. Hong Kong and India also delivered good figures for industrial output and GDP.  Turkey meanwhile confirmed the positive impressions we took away from the leather fair in Istanbul in January by posting a 13 % increase in industrial output for the year.

Market Intelligence

The predictions of previous editions of Market Intelligence were largely confirmed as demand remained strong during the period under review (March 10 -24 2003) and US hide exports continued unabated, reaching nearly 800,000 units. Good volumes of sales and a good clearance of production were reported by several sources.

The view that the uncertain world outlook and downward pressure on finished product prices would militate against raw material suppliers upping their asking prices was also largely borne out.

Based on long term assessments, price variations remained in an extremely narrow band as markets in the USA and Europe retreated very moderately. However, there was some talk of South American origins showing signs of rising prices.  This would indicate that, against the backdrop of the current economic uncertainty, sellers are opting to stay sold, so as to ensure their cash flow positions remain intact. This of course co-incides nicely with the interests of buyers with fixed leather orders.  It also favours those with the courage to buy raw materials at profitable levels.

There is at present a massive divergence of opinion among our various sources as to the present situation. On the one hand, there is the mood of the mainstream tanning trade, which could best be described as pessimistic. Indeed, many of them called into question the news about strong sales and good hide clearances, as described above.

Speak to the larger producers and manufacturers, however, and an altogether different picture emerges. A theme of the previous Market Intelligence was the success of the large retailers and brand names in 2002 and we commented then that there was no reason to believe that they would be any less successful in 2003.

This too would appear to have been confirmed as the US sportswear giant Nike posted very good figures and also a strong order book for the coming months. Even though part of this will inevitably be accounted for by sportswear and accessories, there was no reference to any problem in the shoe business.  So even though the larger companies that we stay in regular contact with have remained cautious with their comments on the near future – obviously the Iraq effect – they are certainly not complaining about their present business situation.

Another good example of the gulf of opinion that exists between different parts of the leather pipeline are the comments made at the Düsseldorf footwear fair, last weekend.   In terms of the show itself, most comments were downbeat, with several complaints being heard of too few visitors being present and too little business interest. 

As ever, the loudest complaints were heard from the smaller companies who mainly operate within the European marketplace. With the depressed market situation in Germany, those companies focussing on continental Europe with unbranded products were always going to find the going especially tough, and so this proved to be the case. 

Not so those businesses that operate globally and more toward the upper end of the market.  While admitting that, in a market where 50% of production is now sourced in China, business was not easy, they also appeared to be coping well.

Indeed, taken in a global context, the business in shoe leather worldwide would appear far healthier than reports from Europe alone would suggest.

This leads us to another interesting subject. For quite some time we have been saying that, despite the weakness of some Western retail markets, the world footwear market has generally remained in good shape.  With the slowdown of car sales, in particular in the United States, and the  resultant reduction seen in demand from automotive tanners, we are now seeing a situation emerge where leather for footwear and accessories is re-emerging into the limelight.  We believe this could ultimately see these types of leather exert a stronger influence on trends than is currently the case.

Elsewhere, it is also becoming increasingly obvious that volume producers of automotive leather are becoming less reliant on superior quality hides.  With advances in cutting and sewing technology, they are becoming increasingly adept at mixing and matching different raw materials that both achieve good quality results and yield a decent profit.   This is a far cry from the situation that prevailed around 18 months ago, when we complained in Market Intelligence about the lack of imagination being exhibited by automotive tanners in their use of raw materials. 

The logical outcome of this, we believe, is that the price gap between top quality hides and leather and their more economical counterparts will continue to narrow. Better optimisation of raw materials through improved finishing technologies, more accurate cutting by tanners, plus the massive downward pressure on finished product prices will in our view continue to erode the price attractiveness of high priced leathers.  Going further, we believe they will end up becoming the sole preserve of the high end producers.  The process has already begun.

By contrast, interest in furniture and garment leathers would appear to be on the wane.  The interest seen in dairy cows around January/February and the high raw material prices that stemmed from this are now all but a memory and with Europe now entering into its seasonal summers decline, one can only hope that interest from China will take up the slack.

We also sense a renewed upsurge in the number of businesses relocating from the classical tanning and leather manufacturing centres of Europe to the Far East.  Sadly but inevitably, reports of layoffs and production cutbacks in the Mediterranean countries are now almost a weekly occurence. Considering that we are in March and the low season of production in Europe is still in front of us, our prognosis for this part of the world is far from positive.

The split market continued to remain firm – especially with regard to splits derived from wet blue hides. However, lime split material continues to attract few takers with prices remaining well below their wet blue counterparts and it is here that we come to an interesting problem.

Until now, grain leathers deriving from lime split hides have offered tanners certain advantages it terms of better yields, specific products, softness and better total revenues in the total calculation of a hide. Today, however, the return on wet blue splits has in most cases reached such an attractive level in comparison with lime splits that the advantages of lime splitting have all but been negated.

This is a situation we intend to keep a close eye on as the sharp increase in the value of a wet blue split has in our view created an imbalance between the wet blue split price and the price of lower quality hides from various origins.

The sheep and lamb skin market again lost again some of its momentum from the levels noted at the beginning of the month, with Turkey and China have showing much less interest.

Are we now in the position to decide what the coming months are going to deliver? We really don’t think so. The world is now waiting for various leather fairs in Asia in particular next month’s APLF in Hong Kong.  Though we have come across isolated reports of companies having second thoughts about going because of the current high profile cases of ‘flu in the area, we believe that this is an overreaction.

The results of the Iraq invasion will be much clearer in the next 14 days and most likely oil prices will not reach the levels that the pessimists have been citing. Consequently, one of our largest concerns for the global economy is likely to be reduced in its effect.  Under normal circumstances, we believe there is no reason the markets will depart from their current side-stepping pattern or the narrow price band that has been in place for some time.  The depressed mood of the western economies will continue to weigh on finished product prices, but at the same time the strong clearance of raw materials seen over the past week should enable sellers to be much more relaxed about their future. At the very least, we believe it will not lead to major price concessions in the coming weeks. And as boring as it might seem, we continue to believe that the market will not leave its current and very narrow price range.  Those who require constant and consistent supply would be well advised to protect their supplies.

We leave the date of the next publication open at this stage. The next Market Intelligence is scheduled for April 7, the first day of APLF.  Given that show’s importance as barometer of trade sentiment, however, we intend to postpone the report to the week after.

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