Realities hold sway over attitudes in the marketplace
Macroeconomics
Nothing too exciting really happened in the general financial and business world during the period under review (June 14-28). It was mainly a case of a continuation of existing trends.
The USA trade deficit widened again to a whopping 5.1 % of the GNP. Although interpretations of the figures are different, the general consensus is that we might get used to the numbers increasing on a monthly basis. If this happens though, it’s unlikely the rest of the world will like it. Neither a dramatic fall in consumer spending (imports), nor in the value of the USD, will please the global economy. The sequence of rising interest rates and inflation, followed shortly by a recession also needs to be recognised. It has been agreed that we are yet to find any indication of what is going to happen in the short term but there is a strong likelihood that the Gordian knot will be untied one day.
In the meantime the world is still fighting with unchanged problems. Despite experiencing a slight fall, the oil prices are still high, terrorism continues to threaten the global community and there is every chance
Inflation is still continuing in the USA (+ 4.9 % for May on an annual base) and also in the UK, which is currently experiencing strong retail sales (+7.4 % in May).
With commodity prices being approximately 20 % higher on average against a year ago, we want to advise our readers to take out their history books and remember the rates of inflation of the 70’s and 80’s.
Market Intelligence
The pre-summer analysis concerning raw materials and the product pipeline we executed in the last version of Market Intelligence has been justified over the last fortnight. However, our cautious conclusion that had suggested there was a possibility tanners may reduce some of the raw material prices prior to the European summer holiday period failed completely.
Tanners’ inventories did not allow them to wait any longer to make their purchases and the sellers’ positions were more comfortable than expected. Towards the end of the period it seemed to be mainly Asian buyers returning to the market, but their attempts to lower the bid prices failed because the sellers didn’t have to decrease their prices in order to sell and ship their products. Consequently prices at the asking level, or higher, were achieved.
This situation was relevant across almost the whole offer list, but it was evident the main focus of interest was on those hides most suitable for upholstery leathers, while the demand for shoe related grades was much less. Those people who have been buying over the past few weeks have grabbed themselves bargains because there is little hope there will be more in the next weeks.
So, why did the situation develop in this way? Our regular readers know that we tend to be cautious about market developments and that we have the same respect for both tanners and leather buyers. However, we have dealt with two market factors which have become more dominant over the past weeks. These are:
- a lower level of inventories throughout the supply chain, and
- a good demand for consumer products around the globe
With this in mind, it’s easy to understand the reasons why hides and skins could eventually reverse their trends, especially when you also add the fact that:
- the main retailers and brand names for leather products enjoy healthy profits
- the kill in the
- inflation starts to become an issue again
- commodity prices in general are already higher.
The fact that prices have stayed under control during the first six month of 2004 is extremely positive, but there is still a good reason not to get overexcited. We continue to remain cautious about the market development and are expecting the holiday period will cause things to change slightly.
Profits
Anyway, the key question is not just if we see small market movements, but if we have reasons to believe that the market could leave its trading range which has now been intact for such a long time. When we excluding the short lived price increases the USA experienced during the BSE crisis in January 2004, it seems we have been living in a safe price haven for almost a year.
Analysing the arguments, we find one strong reason that the market could leave the trading range on a positive. The healthy profits most companies are currently reporting do not match the complaints they are making about price pressure, and it has become apparent that everyone is protecting their own interests. People have made complaints about results and profit margins since the leather business came in to existence, but the clear fact is that for quite some time the raw material prices have allowed the majors to achieve solid profits.
Assuming nothing major happens that could affects global consumer demand, and pre-judged inventories are kept low, and retail stocks are replenished to suit the next season, then it’s likely a solid base for a steady or rising demand for raw materials and leather will be laid. At the same time there is no reason to believe the offer of raw materials will increase during the second half of the year. Another factor that has kept prices under control is the industry’s global trend to avoid security stocks, especially when it comes to raw materials. In the ‘good old days’ a number of tanners either carried excessive stocks (particularly during periods such as the current climate where raw material allows profitable figures) or they ran larger contract positions which were honoured as long as the market remained steady.
Stability
When the price trend was falling they tended to ignore it or renegotiate. With the great stability in the market and the reduced access to credits and capital, these trading attitudes have almost disappeared and now buying and selling activity reflects the realities of physical supply and demand more than ever before.
The relative market stability has not only refrained tanners and hide sellers from taking excessive positions, but it has also kept traders attempting to obtain margins from market movements under control. A culmination of factors - including the market failing to offer any real reasons for sharp movements, long-term trends not being justified and the positioning in the trade possibly being at the lowest level ever - has meant the appetite to take positions has remained fairly low.
Do the above factors mean things are completely different now, and should everyone go out and buy because the prices will be increasing soon? It may be that we don’t have a ‘risk taker’ mindset, and we still don’t believe that we will return to the ‘old-style’. Business has changed however, and the result is that today the players, management and business strategies are kept under tighter control. Markets are more transparent, information can be obtained more easily, and last but not least leather can still be substituted or the amount of leather used can be reduced more quickly.
So, without massive external influences one cannot expect sharp market movements. The ups and downs we have experienced for a long time will most likely remain the standard determining factor. The medium/long-term trend, and also the trading range will however be guided by the fundamentals of ‘total offer versus total demand’. Under the present conditions it is unlikely anyone would be surprised if we were to see levels at 5-10 % higher over the next 3 months than they have been during the last three months.
In a way it has already happened, but it has not been visible in absolute prices. Many people are only watching the accurate prices of certain hides, skin types and categories, and the simple figures for the same parameter have not been watched. Tanners and leather producers have however already been reacting for some time now. Whether it has been a strategic decision or just the result of daily economics; tanners and manufacturers have merely been stemming the underlying trend for prices by using cheaper and more economical raw materials. As a result, this has kept other prices stable despite being nothing else but an indirect increase of prices. With the help of technology and improvements in production; hides, skins and leather types have been used and have fully satisfied the existing demand. We still see further potential and options in this trend but it is not unlimited, and one can see lower price origins are already allowing for higher price gains. Rising prices for lower priced materials has always been a good sign of a firmer market.
Comfortable
What has happened in the other fields? The split market was sidestepping, but the increased demand was noticed. Lime split productions have already felt the effects of the ‘summer holiday’ closures and those tanneries still working are struggling to find allocations for materials produced in late July and August. Cheaper and lower quality splits still face price resistance, but we assume the market will not see many more price changes over the summer – as it hasn’t for some time.
In the skins market conditions still remain difficult to judge. Some are still reporting steady demand and price levels, while others continue to complain of insufficient interest. We consider the skin market and the hide market to be quite steady. The demand remains intact, but prices for all products seem to be at their limits. We can also only expect a change late summer when garment orders – in particular from Russia – have to be placed, and when tanners and garment makers are clear about the orders and therefore the raw materials needed.
For the next two weeks will probably see a steady to firm trend based on the levels seen in the last few days. Kills in
