Macroeconomics

Meaningful statistical indicators were few and far between during the period under review (June 2-16). The global stock markets continued their moderate recovery and compared to 3-4 months ago’ the gains are beginning to look impressive. If these can be stabilised or even extended it would likely stimulate world consumer demand.

SARS is further retreating and in most areas of China the past few weeks have passed without any new cases. The World Health Organisation (WHO) has already removed quite a few of its  warnings and, except for Beijing and Taiwan, almost all restrictions in Asia have now been lifted. Anecdotal evidence suggests that that life in China and Hong Kong is now returning to normal, but it can be assumed that controls will be much tighter in the future to safeguard against new outbreaks.

The dollar continued to trade in a narrow band against the euro but fell on Friday (13^th) to close to it lowest level, and all because of a consumer confidence indicator that came in slightly below expectations.  With the indicators being watched week by week one should not forget that  economic growth in the USA in the second half of the year is expected to be in the region of 3-3.5 % while in the Eurozone it is expected to struggle to manage 1-1.5 %.

However, the current gap between interest rates and the budget and trade deficits are continuing to impress the financial markets, even if the USD/€ rate needs to be closely watched for the short term fluctuations.  Growth in the Japanese economy meanwhile was upwardly revised by 0.6 %, what is obviously not by a great deal, but more than they are used to. The amount of money in circulation in Japan also increased. A sign of recovery and expansion over the coming months, perhaps?

Market Intelligence

The markets continued their descent and – at least in Europe - the classical pre-holiday environment developed. With the vacation period now almost upon us, sellers of hides are becoming increasingly nervous, while European tanners (those who have orders at least) have appreciated the market reaction and falling  prices.  But conditions for tanners remain tough; margins are widening, capital investments are reducing as are market price risks.

Many seem not to care too much about the raw material market as they are missing orders and consequently they don’t need hides. These tanners are at present the driving force behind the slide. Since they don’t need product, they are not shy to threaten suppliers with very low and in some cases even ridiculous price indications.  This continues to give rise to volatile market conditions. With the current lack of normal business, it would appear that stories and rumours now have more importance than real business.

All of this begs the question; What is now the real situation?  As usual, we dare to have an opinion:

To recap; the main global events of the past months have been:

·        The global economy slowed down

·        The war against Iraq put the world economy on hold for a number of weeks and lifted oil prices.

·        Downward price pressure on finished consumer products has become the norm.

·        SARS paralysed great parts of Asia and in particular China

·        Currency fluctuations have been very strong and the volatility of the euro/dollar exchange rate has emerged as the most important variable in determining hide prices and production costs.

·        Raw material prices have adjusted accordingly

There might be others, but these seem to us the most important ones.

All the above have created a situation with two completely different influences.

a)      The shift in shoe and furniture production to Asia was accelerated by the decline in the dollar while the competitiveness of the large European tanning centres in Europe declined further.  Such was the speed of the devaluation, it became impossible to compensate through adjustments in raw material procurements or cost reductions. As a result, that two very important tanning centres in the world (Italy, Spain) are suffering from insufficient orders.  Demand from Europe might otherwise have offset the worst of the problems, but this did not transpire because of the weak state of the European consumer marketplace.

b)      Raw material prices fell in sympathy with the decline in orders for finished products. While in Europe and in parts in the US, this was related to the slowdown in the economies, in Asia SARS emerged from nowhere to decimate consumer demand. Because of this, we didn’t see the normal market reaction of demand increasing in line with falling prices. The falloff in demand was clearly reflected in the short delivery timescales and low inventory (Just in Time) policies previously adopted by many manufacturers.

There was no light at the end of the tunnel in Europe and Asia for the reasons stated above while in the USA, the largest consumer of hides and skins and leather, the car industry, offered few signs of hope.  Not a single leather-consuming main market offered the signs that producers and manufacturers were desperately seeking to increase their orders. A possible contributory factor was the monoculture of products that currently exists and here we are talking mainly about the shoe industry.

If we take just a brief look just at the market for women’s shoes, then it must be accepted that the athletic footwear brands have been very successful in carving out new markets for their products, to the extent that they now dominate fashion in the 10 to 40 age range. These type of shoes do not require any sophisticated leather properties, production technologies nor designs. As a consequence, a large part of the fashion market has moved into the hands of the mass manufacturers in the low cost producing areas of the world.  The upshot is that the quality, fashion and design oriented manufacturers of Europe now find themselves out on a limb and without enough market and production to maintain the industry.

Coupled with this has been the cooling in the demand for new cars, a factor which in turn has made auto manufacturers much more cost conscious.  In terms of the leather industry, this is  more and more reflected in the reducing spread of prices between the various hide qualities of the world. Our readers will recall that as recently as two years ago we had the opposite situation when the spread between top quality and low quality hides was at record highs. As usual, the question on everyone’s lips is whether or not the present market conditions are going to persist.

It might be too early to tell if the situation we’ve had for the past ten months is going to change soon and nobody (ourselves included) could have predicted as recently as eight weeks ago that things would become as bad as they are today,  but at last we are beginning to see some glimmer of hope that the second half of the year will be better than the first.

The global economy is certainly showing signs of recovery. Raw material prices have corrected in most cases to the point at which they are no longer overvalued. In Europe, they are not far from the lows that were only previously experienced after massive economic crises. Due to the grim outlook and the expectation of further falls in prices, many manufacturers have not yet restocked their inventories.  Any increase in demand will therefore be seen quickly in the market. Last but not least there is no reason to believe that the total consumption of leather products could or will decline. Rather the opposite is the more likely to happen.

Let’s now take our brief look at the split market where we have very little change to report. Despite the seasonal slowdown in the European markets, splits remain in consistent demand and are satisfying reducing seasonal productions. However, we are beginning to hear of  price falls here and there and this would support our view that splits require a correction, if only to get back in line with general market levels.

In terms of lamb and sheep skins, the seasonal Turkish demand for double face skins has increased. Business activity has increased considerably but supply is still good enough to meet demand. So, with the exception of top quality double face skins,  prices have not changed very much. The nappa business remains seasonally very slow and we can’t see any improvement there. In Spain, one of the largest skin tanners (Maximo Mor) has had to file for Chapter 11-type bankruptcy protection, this being another  example of how difficult business has become for many tanners in the Mediterranean.

For the coming weeks we expect that the speed of the market decline will slow significantly.  We might even see a consolidation of the market, at least in Europe. In the Americas, the market will continue to be more influenced by the high kill which has to be expected for some time to come.  The months of June and July are mainly influenced by the holiday period which means we are unlikely to see any sharp rebound in levels of demand and prices.  Nevertheless, the market needs to be closely watched if we are to build the foundations for a strong recovery in demand in August/September time.  It all goes to prove that markets move in cycles rather than in terms of weeks, months, or even years.  As ever, the watchword is preparation.

Share this story: