Macroeconomics

Things were reasonably quiet during the period under review (July 28-August 11 2003).

The stockmarkets reversed their previous gains and settled back –the main backsliders being the companies that had previously made the biggest gains.  US GDP increased by a better-than-expected 2.4 % in the second quarter, though unemployment levels were not particularly friendly, rising 0.2 % to 6.4%.

The Asian economies continued to set the pace as Korea followed China with a whopping increase of more than 7 % in industrial output.  A sharp (6.7%) rise in consumer spending meanwhile was posted in China, despite the effects of SARS.

The currency markets remained settled in their summer trading range and they are unlikely to depart from this in the short term. The main question remains whether China will devalue the Yen, though the likelihood of this has receded.  The business outlook was generally positive as the European car manufacturers (BMW, Mercedes Benz, Audi) as well as major retailers (e.g. Karstadt) all issued positive forecasts.

Economists are still arguing about the future. While some have joined the business world in their optimism, others have taken a  more cautious line, though both agree that the Western economies have bottomed out. We tend to agree with the more cautious thinkers.

With the continuation of the holiday season, it will be another 6-8 weeks before the financial market begins to deliver meaningful indicators for the future.

Market  intelligence

There was more excitement around than one would expect for the time of year. Anyone who thought the general summer hiatus would continue (as we did) were proved wrong.  However, we were right in our forecast that Asian tanners would take the opportunity to buy while the Europeans were on holiday.

Enquiries from and sales into Asia (especially Korea and China) remained strong as well-sold suppliers took the opportunity to raise their prices. This was supported by a well-sold position and  expectations of a better global economy in the second half.  In the end, the quantities sold were not really exciting, but as US export sales figures for the last three months prove, the incremental effect of events over time are often more important than the ‘here and now.’

As expected, sellers regained control of the market and took the chance to lift price levels. As a result, some US markets broke out of the trading ranges that had been predicted for them in the run up to the end of the holiday period. The readiness of tanners in Asia to follow the price rise can only be explained by insufficient inventories and optimistic expectations for leather orders later in the year.

This brighter outlook was supported by the upbeat results posted by market frontrunners such as adidas and Puma, despite the continuing gloom hanging over the US market.

The outlook continued to be mixed in automotive sector, though here too the mood was positive overall. Global production was well up in the second quarter as leather penetration continued to rise. Even garment leathers appeared to find their feet with especially strong interest being seen in dairy cows, which is the dominant raw material for this type of leather. Little activity was noted in the furniture upholstery market which is in the seasonal doldrums, though it will be interesting to see the kind of start the season gets off to in September, given the buoyant mood elsewhere.

All this pushed the US market up another 3-5 % in total and  many grades have advanced 10-20 % from the lows seen as recently as 8 weeks ago. Many will remember that we never really supported the market freefall scenario suggested by some, as we couldn’t see how it was justified. In the event, we saw what could best be described as a small panic as deflationary fears,  record slaughter in the USA and onset of the low season all conspired to give people the jitters.

As ever, the market cycle in the US and Asia prevailed and we hope our readers followed our long-standing recommendation to think in terms of cycles.  If you did, you should now be well prepared for the coming weeks. In describing the current market situation, the title of the very first Market Intelligence (‘When a blip is mistaken for a trend, nobody wins’) springs to mind, and it will certainly not be the last.  Since the US and Asia are the pacesetters of the global market, it is only a question of time before the same thing occurs in other markets.

The market picture in Europe was dominated by the holiday period.  In that most people were on vacation there was no hide market to speak of, just a few sellers remaining at their desks.  But those who kept an eye on the situation overseas realised what was going on. Despite the relative market inactivity, there were some short sales to be had, but generally speaking it was difficult for traders to find inventory to cover their needs.  Only small volumes were shifted, mainly female hides and low grades. The classic male business meanwhile was idle except for supplies destined for contract tanning facilities. This situation kept the market under control, helping to prevent bottlenecks in the supply chain, despite exceptionally low slaughter in Europe.  If the extremely hot weather in Europe continues, any increase in slaughter cannot be expected in the short term. As a result, tanners returning from their holidays towards the end of the month and hoping for unsold material accumulated over the summer could be in for a disappointment.  By the next issue of the MI we will certainly know something more meaningful.

Monitoring the present situation, it is clear we a getting close to a crossroads in the market and  that positive factors now hold sway.   It is widely accepted that there will be an improvement in the US and European economies towards the end of 2003 and into 2004. The dynamic of the emerging markets (Asia, Eastern bloc) could be enough to maintain enough demand for raw material,  although the outlook for the European tanning industry is in general not particularly good for structural reasons. The big question of the moment is whether the tanners and manufacturers are buying to service orders already received, or whether they are trying to anticipate the optimistic outlook by buying their materials early.  While no-one knows for sure, there is certainly no shortage of Asian tanners looking for prompt shipments.

Historically, the hide market has always been a frontrunner for general economical development, being generally 6-12 months ahead.  Given the current high levels of activity within the industry, it would therefore be reasonable to conclude that things will start improving on a macroeconomic level. And when they do, we are likely to see further improvements in the markets that are already on the mend, and the reawakening of those that have become dormant.  

Watching other commodities, there is no shortage of evidence that a global economic upturn is on the cards. Many industrial metals, oil and agricultural commodities have risen on the assumption that global production and demand are going to be strong towards the end of 2003 and in 2004. It is not so much current demand pushing the prices, but the futures.

Turning to other segments of the leather pipeline, a strong recovery of interest lambskins in Turkey is to be noted, as is new interest in Nappa skins.  It is not really surprising for the time of  year, but certainly a bit earlier than expected. It also confirms that expectations for business can’t be too bad and that orders in particular from Russia are coming in.  Considering that skin production worldwide is down and not expected to increase over the next month, this market can be seen to be building a strong  base for the near future.

The split market maintained its position as prices remained surprisingly stable. This mainly stemmed from reduced soakings in the second quarter. The price ratio between low grades of hides and the preferred grade of splits cannot be justified but it is likely to be widened as low grade hides rally in line with the firmer trends seen in the hide market.  Our outlook for the next two weeks has therefore changed from what we previously thought.  Regular readers know we have never been too pessimistic, but the turnaround in the market has been so dramatic that we must now reappraise our outlook.   Due to the fact that we are not just seeing strong sales but also demands for the rapid shipment of hides, it is to be assumed that leather demand has picked up and that inventories were reduced far too much in the second quarter. What we are now seeing is a process of replenishment, but it is also likely that tanners are building stocks in expectation of better business in the second half of the  year. Consequently, it is to be assumed that the market will continue to be strong.  The potential for improvement in markets that are lagging, especially in Europe, will be stronger than in the frontrunners (USA) where we have seen substantial improvement in recent weeks.  So tanners that haven’t covered their needs to  September have missed the boat.  The others can take it easier, monitor and watch the market with more confidence, but always with vigilance.

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