Flurry of raw materials buying abates as market indicators continue to improve
Macroeconomics
If there was one lesson of the two week period (August 12-26) under review, it was to expect the unexpected Our previous forecast that the currency markets would continue to trade within narrow ranges was proved wrong.
As data was released confirming growing optimism for the economies of the USA, the emerging markets and even Japan, the Euro continued to lose ground against the dollar. The dollar even managed to gain more than 3 % in a week, its sharpest weekly rise in relation to the euro for two years. In a wider context, the €/Yen and USD/Yen exchange rates also served to underscore the changing fortunes of the major regions of the world, while the ongoing relocation of investment eastward was demonstrated by the surge in the Japanese Nikkei Index which climbed easily above the 10,000 mark.
Even in Euroland, however, the news was not all bad. Despite the fact that the leading European economies (
As stated, most emerging markets delivered positive news, with
More and more, the economic indicators are turning positive and, assuming that there is no major flare up in the
Market Intelligence
The market lost a bit of it steam during the past two weeks – at least as far as the world-leading market of the
In
On the other hand, those who responded to the previous mood of pessimism in the currency and hide markets and sold forward before the holiday period are likely to be less well positioned on return from their holidays. This is because the hides they need to cover now will be significantly more expensive than on the day they were sold. Without doubt, many have been wrong-footed by the market twists and turns seen since the beginning of July, when worry rather than hope was the dominant mood.
As ever, however, it is not the fundamentals of the situation that have changed, rather the psychology of its players. And as we all know, psychology is often more important than the fundamentals. Although already mentioned, lets just recapitulate the changes:
- End of the SARS threat
- Fading of the influence of the situation of the
- Low interest rates all over the world
- Strong performance of the emerging markets of
- Support of Chinese exports due to the undervaluation of the Yuan
- No major falloff in consumer demand except the poor performance in most of
- Continuing stability in
- Massive decline of slaughter in
This list, as usual, is neither complete or precise, but it does illustrate why things are looking so much brighter than before. But in that the situation today is also the outcome of previous influences, it does not follow that we can expect the same situation to carry forward into the future. Tomorrow’s market conditions are being created by today’s influences as you read this and, as we all know, things change all the time.
To see where we’re going therefore, let’s analyse where we stand today and here it is useful to apply the classical ‘Who, What, Where and When’ checklist.
Taking ‘Who’ and ‘What’ together, it doesn’t take much insight to predict that the trend toward bigger and/or global and small and/or exclusive will continue and it can be seen that a ‘Premier League’ of leather manufacturers has already been established. Even in the difficult times of the last four months, a sizeable number of producers continued their production almost without any reduction at all. This applies to well connected mass producers as well as for niche and quality manufacturers and the upbeat results of companies like Coach, Puma, adidas, Nike, Hermes, LVMH, Allen Edmonds to name only a few speak for themselves.
We believe that mass producers too will also soon start to benefit from the solid increase in purchasing power in the emerging markets of the world, as well as the steady if not better trend in the
With regard to ‘Where’, then we will almost certainly see the continuation of the shift of production to the Eastern bloc and China, which of course means the positive outlook in Europe only applies to the remaining indigenous tanneries and manufacturers, though these will retain the advantage of being able to satisfy short term deliveries in local markets.
Returning to ‘What’ for the moment, we can see that shoes and automotive upholstery will enjoy the biggest recoveries. The coming shoe shows carry massively significance, not least because they will signal what designers are going to propose. However, it seems that leather is still going to be an important material which means the main questions will surround the types of leather rather than its potential substitutions. Home furnishings can be expected to do better than in previous seasons, with reasonable prospects not just in
Leathergoods should perform positively though, both in terms of luxury and mass produced items. This can be seen in the significant reduction in the mountains of leather scrap built up during the first quarter. Garments appear to have stabilised. Chinese manufacturers speak of ‘reasonable interest’ in the domestic market as well as from Russia, while Turkish manufacturers are seemingly experiencing good and steady orders for double face jackets for the coming winter in Russia.
Finally we come to ‘When’ and here we can see that timing, as ever, is crucial. Asian manufacturers had to show their hand early, because their lead times are longer and they don’t have to follow the holiday season of
As far as raw materials are concerned, we have a reasonably clear picture. Top European tanners had the opportunity to stock inventories prior to their holidays and they took it. Those who bought
Asian tanners were the market makers after their European counterparts went on holidays and also here the top names covered their raw material needs with great gusto. With their longer lead times, we assume that most of the big players have most of their leather orders already in hand and that it is this that is driving their ongoing interest in raw materials.
As a consequence, we are less enthusiastic about the coming weeks. We feel that most of the real production needs are now well covered for the meantime. Most markets have moved and – except for global market price adjustments – it would require a major upsurge of additional leather business in the coming weeks plus a great success at the fairs for tanners to increase their raw material orders to safeguard their production needs for the medium to longer term. A clearer picture of the leather business can’t be expected before the beginning of October and this would be – in our view – the time when the next decisions are being made, when the markets have time to settle back.
One question we haven’t asked is 'How much?. It is clear that prices in USD have again reached the level where, unless strong demand is going to allow price increases for leather and finished products, it will be difficult to squeeze more profit out of the product. Given that the leather industry is still suffering heavily from global overcapacities and finished product prices are still on a deflationary rather than inflationary curve, we don’t see this happening. In fact, for the rest of 2003, we think this can almost be guaranteed So our advice to tanners is to take great care with regard their raw material price levels.
For 2004 and beyond, one could draw a scenario of sharply rising raw material prices, plus higher energy costs and rising interest rates. This would be the seed from which inflation grows and all of a sudden the price trend could reverse. But this is perhaps a scenario to be explored for one of the future editions of Market Intelligence.
So, we leave you on an optimistic note and hope it will offer our readers some good arguments to think about their business strategies. Even if you don’t agree, it might suggest issues for you think about as part of your own planning process, which at the end of the day is what Market Intelligence is all about.
The coming weeks will again deliver more information and we will all meet at the first large global leather show after Lineapelle in May and for almost a year in
More about this and many other things in our next edition of the Leatherbiz Market Intelligence.
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