Nothing really exciting happened during the period under review (January 29-February 6) as the currency markets stayed within the range that has been in place for some time now. With the US posting disappointing unemployment and budgetary figures, the dollar lost some of the ground it had previously gained, finding few supporters in the financial markets. The gains made after the verbal interventions of the European Central Bank also evaporated. America's economy grew by 4.0% at an annual rate in the fourth quarter. That, however, fell short of the consensus forecast of 4.8%. The Institute for Supply Management's manufacturing index rose slightly to 63.6, up from the downwardly revised December figure of 63.4. The ISM's service-industry index, however, rose strongly from 58.0 in December to 65.7 in January. ISM readings above 60 indicate rapid expansion.

Market Intelligence

As expected, it was a very quiet period and maybe even quieter than we were expecting. However, the Asian holidays and strong price positions previously taken by buyers and sellers made it  difficult for volume trade to be successfully concluded.

On the plus side, with more and more positive news coming from the major leather-consuming brands (adidas, Puma and Wolverine being just a few examples) and confirmation that order books were being filled at a decent rate for 2004, the longer term outlook for raw material sales is much brighter. At least in theory. To gain a perspective on a long term basis, one simply needs to compare the current situation with that which prevailed a year ago. 

Last year, prices fell in the second quarter due to global uncertainty in the run-up to the second Gulf War and because of the emergence of SARS in Asia.  Today, much of that uncertainty has gone as SARS has been replaced with bird flu.  Considering the more widespread nature of bird flu, it is surprising that public and global economic reaction has been so muted. If this continues to be the case, then the effect on the leather and raw material markets is likely to be limited.

Consequently we are now in a period where conditions for the global sale of consumer products are favourable. However, this is not the end of the story. If it were, then raw materials and leather prices would be much higher than they are today. Even the effects of the US BSE case were transient, with most of the gains made in hide prices having been partly erased since.

So why hasn’t the market been able to take greater advantage of the situation so far? We have already dealt with this phenomenon in early editions of Market Intelligence when we said the restructuring of the leather industry would lead to new patterns not just in the pipeline, but in market developments as well. The following are what we see as being the biggest influences on the current situation:

a)      The continuing shift of production Eastwards

b)      The continuing integration of the manufacturing chain

c)      The continuing increase in the size of companies, i.e. an evening out in the balance of power that exists between producers and retailers

None of this is new or hardly lends itself to the speculative buying of raw materials. More than ever, price points for the finished product are determining the price of the raw materials, one indicator being the market’s muted reaction to the US BSE case.  In the past this would have been the trigger for an avalanche of speculative activity, not only by traders and speculators  but also the tanners themselves. It should not be forgotten that tanners –  particularly those in Asia – are heavily involved in the speculation game themselves.

But now market conditions are much better controlled. Speculation is no longer the issue it once was and the number of leather prodders has increased to the extent that they are now controlling the market from their side as well. There is also a greater exchange of ideas observable between the leather and beef industries.  Coupled with this has been a massive increase in both the transparency of the business and availability of  accurate management information to the main players, this report being a prime example.

With the enormous price competition for consumer products, there is consequently little room for raw material prices to rise.  But due to the good demand for consumer products, there is also little room for them to fall either.  So what is the situation currently observable in the leather market? 

Furniture leathers are definitely seeing more demand and even Italian producers admit a moderate increase in orders taken over the past few weeks. Shoe business has entered its seasonal low season, but it would be reasonable to assume that the aforementioned positive news from the big brands is a sign of better times ahead for the tanning and shoe industries.

Some are claiming that more of the classical leathers are returning to fashion.  If this is so, it will benefit not just the Italians and Spanish, but also Indian tanners who are increasing their share of fashion and quality output. Automotive is in a more uncertain state but is holding its own, despite the major shifts seen between the brands. We will have to wait and see if the promised explosion of new models stimulates a corresponding upturn in demand.

The split market continues to exhibit steady demand, for no other reason we can think of than the continuing downward pressure on consumer product prices. While we think this will continue, we also consider that splits are overpriced at current levels.

Sheep and lambs did not bring too many surprises. While Turkish buyers were more active, most market participants are claiming they have been unable to convert too many enquiries into purchases.   It might take a few more weeks and the season getting into full swing to get a clear perspective on where things are headed.

Our usual view into the crystal ball is not much more exciting as the current situation as the market would appear to be settling itself back into more realistic price relations.  While the US market is currently in corrective mode, its European counterpart is continuing to suffer from poor business,  but might just be supported by the low slaughter. So, one can just about continue to expect further sidestepping prices with US hides on the weak side and Europeans remaining steady. 

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