Macroeconomics

The economic outlook continued to brighten during the two weeks under review (October 20-November 1).  By far the most optimistic indicator was the 7.2 % expansion seen the US economy during the third quarter, the biggest quarterly rise for nearly 20 years. Further encouragement arrived in the form of the 0.7% rise seen in US manufacturing in September and the increases in both the October durable goods order book and the closely-watched Chicago Purchasing Managers Index.  US interest rates remained unchanged and it was confirmed that they will stay low for some time. Inflation remained under control and the base for economic growth remains intact.

As good as the figures were, however, it should not be forgotten that the USA is heading towards an election year and a lot of numbers are well prepared for the decisions of the voters. The size of the trade and budget deficits should also not be forgotten.

In line with the better news, the greenback recovered a bit of ground.  Speculators appeared to not want to bet on a further and sharp declines in the US currency – at least for the time being.

In Europe things remained flat. Industrial production remained almost unchanged. But here too hopes were building that the worst might be over. Germany is fighting hard for reforms and despite the poor state of the economy, acceptance of the massive changes that are going to be needed, both economically and socially, is growing.  One can only hope that democratic procedures and politics will not kill off the mood towards reform. At least the business climate index rose in October to 94.2, its highest level for two years.

Better news also predominated in Asia.  In Japan, industrial production rose by a better than expected 3 % while figures released showed that the China’s GDP soared 9.1 % in the first nine months of 2003.  Most stock markets in Europe, US and Asia meanwhile posted further solid gains.

The only downbeat news came from Russia,. Right after we had mentioned the consumer driven expansion of the country’s economy in our previous  MI, the main owner of Yukos, one of Russia’s big oil companies, was arrested on corruption charges.  This shocked the financial markets and stocks in Moscow fell sharply. The recent political changes in Moscow and the autocratic manner of Vladimir Putin is increasing suspicions that the country may be regressing to its old pre-glasnost ways.

Market  Intelligence

In the past two weeks, interest was centred on two subjects only. The first was the question of how buyers and sellers of US material would respond with the price levels set out in the two weeks previously and the second was what kind of mood Lineapelle would find the industry in.

In terms of the US materials issue, the US market and the players did what was expected. The attempts of the big sellers to push prices up by pointing to lower kills fell on deaf ears. Buyers had bought enough hides until the end of September, so they were not forced to rise to the challenge of the sellers. It is to be assumed that the price increase asked by one big packer was not as serious as many in the trade took it to be. It became evident there was more hype than substance attached to the moves made.

In fact, less US hide business was transacted than might reasonably be expected for the time of year, and nowhere near the level of prices that sellers had hoped for were reached. We feel vindicated in our view that the trading range that was prevalent in the summer (HTX between $60-65, as an example) is the one which gives tanners an acceptable profit margin and which  therefore is the one they are willing to buy at. Since we are now above these parameters – at least officially – sales have become more difficult and the volumes shifted have declined. Well, we are on the way back now, but who really knows the levels at which sales of the last weeks were transacted. Those who report, like ourselves, can only deal with the information we are given.

Indeed, the ‘behind closed doors’ nature of the price negotiations that really matter is why we always refrain from quoting prices and trades. The prices quoted publicly are at least questionable in their veracity. We still believe that the analysis of trends over long time periods provides a much more meaningful indicator of likely price directions.

 Before moving on from the US situation of the  past few weeks, it should be stated that the price increases envisaged by some never really materialised. In fact, prices were even slightly eroded from the levels seen before the market was ‘teased and tested.’

Let us now move to Lineapelle in Bologna. Everybody will remember the predictions made that the fair would provide no stimulus to the trade and leather business etc, and  many will have returned from the show with this view confirmed. But as we all know, things are never quite what they seem in the real world and we believe that beneath the surface, several encouraging trends were at work at the show. 

In order to put Lineapelle into context, however, it is necessary to look at the wider picture. We have already referred to the uplift in the US economy and regular readers of the leatherbiz news section will recall our recent story on the improved outlook for the luxury goods sector.  We have already also referred previously that the global ‘discount mentality’. So we would like to repeat our conclusions made before: Leather is a product which is either sold by image and quality, or used in mass production for simple consumer goods.

Both the luxury and the mass markets represent a solid future at  the moment. As the memories of September 11 further recede into the past, tourists have begun travelling again while the ‘Nouveaux Riche’ of this world have at last rediscovered the joys of spending.  As a result, most  branded and luxury goods producers are posting outlooks that are upbeat.  This much is known. This is good for the leather industry. Ordinary consumer goods producers too are projecting better times on the assumption that the global economical outlook is significantly better. Good for the leather industry again.

Now back to Lineapelle, where everyone who had a clear focus on his or her business had a good show. On the first day, attendance levels were broadly in line with the pessimists’ predications and this helped  fuel existing concerns among many exhibitors about the state of the market.  On the second day, however, things started to improve by the hour. Although nobody cared to go into detail, it was admitted that buyers for leather were ‘in the building’ and doing what was expected of them.  They were handling the merchandise, discussing business matters, delivering more accurate information about the contracts and deliveries they have in the pipeline and last but not least, taking samples away with them.  As news of the improved US economic situation began to filter through the pavilions, more relief was seen because as everyone knows, a strong US economy is the base that will be required to build desperately needed export business.

Increased consumption in the US also means more export orders for Asia and Europe. It can also be expected to spur European consumer spending, something which has yet to lift off to the same extent as seen in the US and Europe.  The sense of hope engendered by this news was almost palpable on the Wednesday afternoon while on Thursday, those who cared to stay behind saw many more relaxed exhibitors, some of whom were even willing to admit to that they had found the show ‘worthwhile.’  Praise indeed!

So much for the good news, but the fair also provided confirmation of the extent to which mass production has migrated to the low cost production centres of the world.

 The discount shopper has created a new retail environment where the traditional supply and production relationships simply don’t apply anymore. Large spot deals and the massive purchasing power of the mega retailers do not lend themselves to European mass production.  Most are now simply to small or too expensive to compete effectively against their Asian counterparts.  Consequently a lot of production capacity in Europe has or will disappear in this field.  While it remained firm, the dollar bought these organisation some time, but no more.

It would be wrong to interpret the complaints of these businesses as an indication of a wider economic malaise  It is a structural one.  Mass production has not declined but is simple being displaced eastwards, something that is confirmed by the knowledge resources of our sister publications of World Footwear and World Leather.  

So while we don’t think Lineapelle marked a turning point, it did underline the value of taking an independent viewpoint rather than running with the herd.  And while the improvements we have talked about are by no means guaranteed, all the signs are that the second quarter did mark the lowest point. Major disasters and terrorist strikes notwithstanding, the world business in leather and its products will be much better in 2004 for many.

The split business market also got some support during the period under review. Not so much as far as  prices are concerned, but fashion producers are showing a clear preference for the material.   If  manufacturers respond to the rising market conditions, we can expect another season with a lot of split leather involved.

The lamb and sheepskin market continued along the path already established, even if double face suffered from the late arrival of orders from Russia. Due to the warm weather, finished jackets did not move in the volumes that the Turkish manufacturers would have liked  and as a result, some Turkish tanners were forced to admit that they were feeling the competition from Chinese producers in their main market of Russia.  Consequently, prices for double face lambs fell and they have declined 20 % in the last 3-4 weeks.

Though interest in nappa products increased, the price sensitivity of both the market and buyers of such raw materials was evident in their price levels, which did not move. It is worth saying that for the coming weeks,  we don’t expect to see any significant change in the raw material markets.  US hides will have to readjust to the levels where tanners are profitable and we believe there is room for a further 3-5 % decline in the main grades. In Europe confidence can be expected to build in line with the wider picture.  UK and Irish hides have always been the front runners and might even have room to rise. The other markets seem to be fairly settled and likely to move within a small range only. A firmer $ will support cows but as males are the exclusive preserve of European tanners, these are unlikely to be affected price-wise from rising overseas demand - at least not for the moment.  The large inventories of raw and wet blue built up by certain companies over the past months can also be expected to deliver some surprises as they become ever more desperate for buyers.

In summary, we  repeat our view the new direction for the market will be clear by the end of November. In the meantime, the markets can be expected to continue to settle, in anticipation of better times ahead. 

Share this story: