Macroeconomics

The Macroeconomics section of this edition of Market Intelligence, covering July 26–August 9 is especially significant, in that there were plenty of figures from the financial markets with relevance to the leather pipeline.

The retail figures for the second half of the year were fairly positive, and better than we were expecting. Consumer confidence in the USA rose to its highest level for two years with retail figures only suffering a decline in the month of June. In general, the American economy continues to grow, but there are some pessimists concentrating on the slower rate of 3% in the second quarter as opposed to 4.5 % in the first half. The property market also experienced record highs, which is positive news for the furniture industry.

In Germany and France, business confidence rose after the domestic figures were published. There are still a few issues that need to be resolved, including Germany’s rising unemployment rate, but on the whole the second quarter started on a positive note for those countries, even if much of Euroland continues to experience flat sales. The situation couldn’t be more different in the UK where there was no sign of any slowdown in consumer spending and where retail sales rose by more than 7% in June.

Most large global companies reported increased profits and sales for the second quarter.  This also applied to companies directly or indirectly related to the leather industry.  We believe this is very important when considering whether the price of leather has room to increase.

The two most important indicators that we follow underwent sharp changes.  As we have said on previous occasions, we believe the price of oil and the value of the US dollar will always have a strong influence on what is happening in the leather market. Last Friday afternoon, we noticed a sharp increase in the oil prices but a sudden drop in the value of the dollar.  Oil prices have reached almost $45 per barrel, while in just one hour the dollar lost almost 2.5 % of its value against the Euro, falling to just €1.23. The reason was the disappointing job figures.   

Our previous advice to watch the currency markets carefully and expect high volatility might have saved a few of our readers from a big shock. This continues to be our advice as we are expecting more volatility in the near future. But neither we nor the financial analysts expected oil prices to exceed $40.  That in itself was a big surprise.

It is  a bit too early in our view to see how the current high price of oil will impact on the leather pipeline, but the present situation leaves us little to be positive about. The cost of energy and chemicals will undoubtedly rise, absorbing a greater part of the budgets of both families and businesses so what we could see are leathermakers and manufacturing companies attempting to increase their prices, precisely at a time when consumers are cutting back on their expenditure. We know these developments are always hanging over us, but if things don't improve, it’s hard to see how they will not occur.

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Due to the holidays, here was not too much activity to report, but judging by the export figures from the US, the last two weeks cannot be called quiet. The simple numbers plus local soaks were high enough to absorb most of the hides being produced on a weekly basis.  Consequently, it seems that the hide market in the United States is not under pressure from buyers. Tanners still need hides and therefore they are still buying.  The ever-present question as to whether prices are firm or weak cannot in our view be answered in the present environment.

We have mentioned on various occasions that hide prices are presently at the upper end of an acceptable range. When sellers decide to lower their exposure to risk in the hide market, by reducing their asking prices by a fraction, this in our view cannot be called a weaker market.  Our regular readers know that we believe that cycles rather than short term weekly or daily fluctuations are real factors at work in the market.

For the remainder of August, we fail to see why we should reach a new direction in the development of raw material levels.  Global sellers will remain in control of the market for the time being, simply because they cannot dispose of high inventories nor do they have the impression that the demand for hides could dry up in the near future.  It is likely they will continue to hold their prices close to current levels, but if they feel the need to keep their production and inventories under control, they may decide to take a few percent off their offer prices.

European exporters working within the US dollar region will have to keep a close watch on the US dollar level. Many who left their desks early last Friday afternoon had to adjust their expectations by two and half percent on Monday morning.  But this can be classed as a normal market fluctuation and is not yet a change in the wider trend.

The majority of the few available market players reported normal, quiet holiday activity.  Since nobody really expects anything spectacular from Europe, most interest was centred on Asia - particularly China. The standard hides have not received much purchase interest since buyers are not really keen to pay the current prices.  There were only a few companies obviously needing to cover some production gaps, and they tried to negotiate arrangements with their suppliers that would cover this need.  Most of the interest was on the lower priced materials.

Our interpretation was that despite the current low inventory rates, there was still the necessity to purchase hides, but the majority was merely to cover some production relating to existing and old contracts.  Despite this, there was still enough of a demand to clean out most existing productions, and one should not forget that there has hardly yet being any evidence of tanners negotiating with their suppliers about their requirements and pricing from October onwards.

This makes us believe that the breakpoint for the market and a new direction in the cycle will occur mid-September to mid October.

Let's just summarise where we stand today by reviewing some of the issues that have been discussed in past reports, taking in to consideration some of the recent changes.

• Leather demand has been high during the past six to 12 months
• profits of global brand names and retailers relating to the leather industry have been good
• oil prices have increased by about 30% in the last three months
• raw material prices have increased by about five to 10% depending on origin
• the exchange rate of the US dollar has remained in a band of 5% against other major currencies in the last three to six months
• inventories along the pipeline are low
• the shift of production from Europe to China has accelerated
• Over capacity is already building in China
• despite a decline in the United States, global slaughter has not seen a significant change
• price competition for finished leather is growing in China
• global retailers and brand names continue to use their purchasing power to keep leather and leather product prices under control
• higher raw material and energy costs will force suppliers to increase their prices.  If these are not obtainable, margins will fall or even become losses.

As usual, this list is not complete. We have missed out the progress of tanning technology and the cost savings derived from the relocation of production. We have purposely not put the list into any kind of logical order, simply because we want to leave the selection of arguments and the conclusions entirely in the hand of our readers.

At this stage, this will remain valid for the coming weeks. We are not willing to make any final judgements yet.  We are not hiding our concerns about the market, and cannot ignore the effect of the higher oil prices, or the fact that hide prices in US dollars are trading at the very high end of the range. Despite all the factors driving oil prices up, the fact that price inflation is low and other raw materials prices are comparatively higher, the leather and hide market is not able follow the normal cycles of commodity prices, the main reason being the availability of substitutes.

There are other markets that also do not have very much to report.  The split market has been suffering greatly and we have no positive news to deliver. Many people speak about rising price pressure, although they are also talking about an increased interest in cheaper priced material in the second half of this year, and therefore it is believed that splits will regain their popularity.  In the end, this market is not presenting enough information for us to make serious judgements for the near future.

The lamb and sheep skin markets displayed a bit more activity and also the Turks were back in the market.  The Turkish buyers of double face lambs had practically disappeared in the previous six weeks.  In the past fortnight, many sellers have disclosed that they have had requests from regular buyers asking for offers and prices for shipment in September. This means that either they had either received confirmed orders from Russian customers, or they were trying to ready themselves for the season starting September.  No matter what the reason was, it was definitely a positive development.  Cheaper quality sheepskins attracted a decent amount of interest from China.  This was not only from the larger tanneries buying for their August/September shipments, but importers and wholesalers too. Looking at the prices of dairy cows, sheepskins look pretty attractive when it comes to cheaper quality nappa leathers. We don't expect dramatic price changes, but it’s easy to predict that skin prices have a fair chance of being well sustained.

We believe that the next fortnight will not deliver anything spectacular from the market as such.  We have already mentioned that we believe that the general financial markets and oil prices will have more of an impact on prices than activity in the pipeline itself.  Most of the Western world is on holiday and a lot of the changes seen in the last two weeks have yet to be factored into business and consumer decisions. We think the market will fluctuate slightly without showing a steady direction. We are afraid this inert environment will continue to characterise the market over the next two to three editions of Market Intelligence.

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