Macroeconomics
The most interesting news during the period under review (March 26-April 8) was the continuing strong performance of the Indian and Chinese economies, as both countries posted growth rates of around 10 % for the last quarter and Indian growth outstripped that of China for the first time.
India created a large number of qualified jobs in research, pharmaceuticals and IT and the purchasing power of the growing middle class is becoming more powerful by the day. With inflation now more under control in both countries, their consumer markets are rapidly gaining headway too. High oil prices meanwhile continued to pour money into the Russian economy, something which can be expected to drive up consumer spending in that country too.
The financial markets delivered no particular surprises. The stock markets recovered a bit and the dollar lost some of its value until the end of last week (commencing April 1). In the main, this was related to the end of Japanese intervention and signs from the European Central Bank that it might refrain from the rate cuts that the markets had been hoping for.
However, the data that really moved the stock and currency markets were the US employment figures. These reported the creation of 300,000 new jobs, higher than expected and this was the news the markets had been waiting for. The economic recovery was seen as finally reaching the job market and both the Greenback and the stock markets jumped in response. US consumer confidence fell marginally from 88.5 to 88.3 index points as retail sales for February rose 9.1 % on the year before. Meanwhile, the Tankan report, which provides a general outlook for the Japanese economy, continued to be very optimistic for the near future. This was in spite of the strong Yen, which could soon become a burden again.
Market Intelligence
All eyes in the global hide, skin and leather business were on last week’s Asia Pacific Leather Fair (APLF) in Hong Kong. As usual, many visitors took the opportunity to travel extensively in the Far East before the show, so they had the chance to share their impressions while there.
Before coming to the specifics, we believe that fair was a success just by the sheer volume exhibitors and attendance. The most important aspect of any trade fair in our view is whether the organiser was able sell its available space and attract a reasonable number of visitors. We questioned both groups, and some were of the view that the show should be transferred to China itself.
But we also believe that the APLF organisers have the right ideas for the coming shows, at least for the next year(s). Though many will not agree, we think it was a successful event. Exhibition space was well sold, attendance was good, the timing OK as Hong Kong confirmed its status as the leading Asian get together. Not only could this be seen at the show itself, but also in the many informal gatherings that accompanied it. After so many years, people now know exactly where to go to after the official dinners to meet friends and business acquaintances in a relaxed manner, and this kind of activity is at least as important as the show itself.
Those complaining the loudest were the European tanners who, by definition, have also been the hardest hit by the continuing shift in production to Asia. Suffering from a lack of global interest in their medium and higher end offerings, they are falling short of the levels they need to keep their productions running. Only those few producing for the very high end of the luxury market can still command the prices they want. But where any fair is concerned, one will always find people who are not happy with the outcome and this spring’s APLF was no exception. In the final analysis, a trade fair can only ever provide a platform for displaying goods and services and an arena for people to talk, and in this respect APLF gave a good account of itself.
So, what kind of news did the days or weeks spent in Asia have to deliver? The short answer is, not much. Most people’s agreements were simply concluded, though this in itself will have come as a surprise to many. As a result, there were probably lots of missed opportunities.
Any lingering doubts that the leather industry is somehow exempt from the process of globalisation were surely laid to rest at the fair. In recent years, India, Pakistan and the leader of the pack China have all made massive strides forward, both in terms of the quantity and quality of their output, raising it to the standards required by the main consumer brands. What has happened in the shoe business some years ago is now being seen in the furniture business and the automotive sector surely cannot be too far behind. This was evidenced during the show by the announcement by the largest player in the Shanghai area that its leather had gained the approval of two major car makers. Against this backdrop, many Chinese tanners are now desperately looking for foreign partners to speed up their approval processes. More than that, all the expansion projects these companies had on the table two years ago are now coming to fruition, confirming the massive growth being seen in our industry in China.
Further projects have been announced, even if it is difficult to believe in all the 6,000 to 15,000/day productions that have been announced for between now and 2007, most in the furniture and automotive sectors. Tanneries serving these markets are already working to full capacity and we heard not a single complaint about order levels from the upholstery leather producers present. Their only gripe was that deliveries were taking too long, meaning they were unable to meet their shipping schedules. Shipping costs were also seen as being too high, but overall things were still just about profitable at today’s raw material price levels.
In fact, Chinese tanners would appear to be having things all their own way at the moment. Not only are they getting a good return on their split credits, the economies of scale deriving from their integrated manufacturing operations are also boosting their competitiveness.
Add to this the undervaluation of the Renimbi and the inherently low production costs of the average Chinese tanning operation and it becomes easy to see why Chinese leather has become so competitive in the marketplace. Another big advantage Chinese tanners have on their side is the sheer size of their operations. Our idea of ‘big fits big’ is now a reality with monster retailers being supplied by equally big suppliers. And when one stops to analyse production costs in India, it can be seen that this country too has a fair chance of becoming a sizeable producer of leather upholstery. India’s labour costs are even lower than those of China, even if productivity levels and the general size of their operations mean they still have a long way to go. In any case one, one can only be impressed at the massive strides being taken in terms of quality by Indian leather-related businesses. And right across board, including tanners, consultants, joint venture partners, chemical companies etc. And this was highly evident on the India exhibition stands at APLF.
The footwear tanning and manufacturing industries had much less to boast about. However, the point was made that athletic footwear is now even cheaper to produce in Vietnam than in China, and some production has already been moved there.
However, we cannot see this ever breaking the Chinese monopoly, at least within the next few years. The Chinese juggernaut rolls on, as confirmed by the recent announcement by Ecco of Denmark that it is to build a large Chinese factory.
The only discordant note struck with regard to the Chinese industry were the rumours of the stockpiles of unsold finished leather by bovine garment tanners in the North of the country, and in the South Korean managed tanneries. Orders from Russia were also said to have become few and far between. Production has been curtailed by some producers supplying this market and there were reports of unopened letters of credit and documents not being taken up. Since we are now in an off-season, it is hard to believe the situation will be resolved before late summer. Fortunately China’s appetitive for upholstery hides continues unabated. Consequently, demand for dairy cows remains strong with good business being done, even without a heavy presence of the traditional buyers of this raw material – the Korean/Chinese garment tanners.
With the massive concentration of production in China and India, finished leather prices are now under pressure. Though mainly due to the purchasing power of the big clients, it is also in part the outcome of the rising levels of competition between the major players and the scenario which they have for long been striving could be said to have been reached. Only by moving to cheaper manufacturing locations will they be able to reduce their costs further. In the absence of big rises in raw material or finished product prices therefore, it can be reasonably assumed that the expansion of production capacity over the next few years will result in increased competition.
The split market began the period quite firm but then lost steam towards the end when the first voices were heard that the party might be over. A lot is related to the problems encountered with tax and customs officers in the South of China. The business just doesn’t run so smoothly anymore. The rising production of splits in China and decreasing output in other areas is also a possible factor. Regardless of the reason, demand for splits is waning, with the pressure especially being felt by those origins that are unable to deliver whole hide drop splits for furniture.
The skins market was just about steady as China continued to buy almost everything that carried a good amount of wool and produced an acceptable nappa after fellmongering. Prices remained pretty stable as the Turks played the New Season market more cautiously than usual. However, skin prices in the Southern Hemisphere remained quite high and there is little hope for a major reduction in the near future. If the demand for double face New Season gains momentum then there may be further room for price increases. But that remains to be seen. Terrorist activity and major currency fluctuations notwithstanding, for the coming weeks, we still see little reason to change our outlook. Price will continue to develop in line with the usage of raw material, upholstery will do better than shoes and garments. Overall there will be little room for further price increases.
