Market Intelligence

Events on the small island of the leather industry were much less exciting than in the wider macroeconomic world.

The return of the tanners from their holidays and trips to Asia and the Shanghai Leather Fair certainly raised expectations, but in a wider sense events served only to underline what a fickle lot the hides and skin sellers are, and that the mood of the industry frequently has nothing to do with the reality.

Our predictions of the previous edition were entirely accurate.  For leather in general, September is the low season and as far as raw materials were concerned, orders were already in place.

Against this background, neither the  return of the Mediterranean tanning industry nor the Shanghai Leather Fair managed to stimulate much demand.

Tanners in Italy and Spain extended their holidays. Many resumed work and production a week late and this speaks volumes for the current state of the European industry.  From the Arzignano area, mixed information was circulated about the water situation. Some talked of shortages after the long drought while others said supplies were sufficient.  Some spoke of problems with the effluent plant while the response of others was ‘What problem?’  Or maybe it symptomatic of a lack of orders and work.

One thing is for sure and that is that Italy has got off to a very slow after the holidays. In Spain the situation was pretty much the same, even taking into account the traditionally uncoordinated manner in which it gets back to work.  We believe this is evidence of the previously-described structural shift in production and demand to the Far East, a theory supported by the notable absence of European exhibitors at Shanghai.

Granted, the show has never exactly been right place for them showcase their collections,  but  one would have expected a bit more presence from the leading European producers in the face of the strength of the Chinese competition.  Maybe they were simply ‘keeping their powder dry’ for other international shows.

The fair was certainly disappointing for the standard hide suppliers. Chinese tanners showed little inclination to buy, bidding around 3-5 % below the asking prices. But since most sellers were reasonably optimistic for business from October onwards, they defended their prices and position until the very last moment.

That said, we gained the impression that Asian standard grades were changing hands close to buyers’ expectations, with the strong prices being supported by specialties such as Heavy Native Steers. Interest across the board was somewhat better from Korea and Taiwan, despite the valiant attempts made by some buyers to bring prices down.

The reluctance of Chinese tanners is easily explained. They are covered well into October and this is their low season for demand. All we spoke to who regularly travel in China confirmed that business was generally good and that few complaints were being voiced at the customer factories.

But as we have previously mentioned, Chinese tanners are much more profit than production oriented. As the US hides they favour are currently just a fraction too expensive for their profit margins, we believe they are simply opting to sit back and wait for price levels to fall, a tactic we think has a fair chance of working.

As a consequence, we believe that the underlying interest for hides and the need for them is still intact. Leather demand in Asia is holding steady and many are seeing an increase in leather orders for the Asian season, starting October.

The business outlook for Europe for the coming months is partly clear, partly not. On the ‘clear’ side, it can be seen that the luxury and automotive tanners are in for a good time. What all the trips throughout Asia have confirmed is that luxury leather items are once again in the buyers’ focus, especially with prestige European autos. We shouldn’t have to repeat it, but automotive tanners are busy, even if they do continue to complain of price pressure from the auto makers. The automotive ‘aftermarket’ – wherever such a thing exists – is also in full flow and many tanners, including those in Europe, are the likely beneficiaries. The fact that activity levels of the other classical European markets of furniture and some shoe and leathergoods businesses are not so clear cut can only be a cause for concern. 

European retail is failing to pick up in the middle price segment which is where the European tanners make their living. Discount fashion (see previous editions of Market Intelligence)  is supporting the trend to cheap imports from Asia and when the quotas for Chinese shoe imports into Europe start falling next year, you can be sure that further massive damage to the European industry will be the result.

So, with the odd exceptions outlined above, we restate our doubts surrounding the future of European tanning.  What the USA has already gone through in terms of the migration of low cost production seems now to be occurring  in ‘Old Europe’.  Where the US has Mexico, Western Europe now has Eastern Europe.  Both of course have China.  

There were some exceptional business bright spots in Asia, with very good demand being seen in splits, lambs and sheepskins. Split sellers that had become a bit worried that they would not be able to sustain their success into the second half were able to breathe a sigh of relief as demand showed no sign of abating.  There was even a shortage that some tanners had no choice but to acknowledge by paying higher prices. This was mainly with regard wet blue drop split which meant those offering ex-lime splits were unable to share in the enthusiasm, though even they may be able to join in at a later date. We spoke to various larger suppliers who were already selling their November/December production.  This was not only because the prices were so good.   The  demand was just too strong for them to resist, even if there was the nagging doubt that they  didn’t trust things to keep going in the right direction.  So, better take what you can get today.

Sheep and lambskins suppliers were equally pleased with the market’s response. With the hot season in China now also coming to an end and reports of improvements in domestic and Russian interest, they had to rush to find more supply. They even considered European skins that for reasons of price and the hot weather had been not fancied in previous months. As a result, some suppliers who did not expect anything from their trip to Asia came came away pleasantly surprised.

So what do we expect for the weeks ahead?

Rarely there has been such a common consensus among the business community about so many major issues, namely:

a)      Business in Asia is continuing to grow steadily post-SARS

b)      The luxury end is strong

c)      Price pressure is persisting

d)      While demand in Europe is better, this has not yet been seen in business       results.

Most of it sounds positive and it is difficult to find negative counterpoints. Consequently, we would term ourselves as being moderately positive for the medium-long term. But we are duty bound highlight potential difficulties.

First, there is the SARS situation, which we do not believe we are rid of entirely.  This was confirmed by contacts in China and we would not be surprised to see the virus return when the weather turns colder, even if its economic impact is that much less second time around.  We think too that the USA economy is a long way from turning the corner.  The Iraq war is becoming more drawn out by the day and nobody knows how to pull out. In the end, this could destabilise the government which in the run up to the elections is in any case under massive pressure because of the rising jobless figures.  On top is this is that the fact that much of the consumer spending seen in the USA has been run up on credit.  Sooner or later, this will have to be paid for. We can only hope that the more laid back attitude of the American consumer compared with his/her European counterpart prevails and that the credit bubble begins to deflate gradually, rather than bursts.

For the coming weeks, we believe the hide market will sidestep with a softer base. There is only a chance by the end of September that we will see new and clear directions. The split and skin markets, however will stay strong on the back of continuing strong demand.

Share this story: