China continues to dominate
Macroeconomics
The financial markets offer no great support in the general analysis of the situation or for determining new trends for the winter season.
Most of the economic data which has been delivered in the last two weeks has neither been exciting nor has it delivered any clear indication as to where the global economy is going in the months to come.
The focus of public interest has been consequently on energy prices due to the inflated price of oil and the brutal terrorist attacks in Russia, which gave the world another clear insight into what we can expect if the fundamental problem is not solved soon. Unfortunately, we all understand that no solution is presently in sight.
The presidential elections in the
As a norm, the currency markets - and the stock markets -have clear indications about what they can expect in the future. However, in the current situation it is not only unclear as to what the real differences in the economic policy will be, the fact that the polls are still very close makes it very difficult for the players in the market to make any real decisions. This is also illustrated by a very narrow trading band in which the US dollar is selling against the major other global currencies at the moment.
Basically on a macroeconomic scale very little has changed. Asia is growing faster than the rest of the world;
Consequently, we have to consider that until the presidential elections in the United States are over, very little can be expected. There is, however, an underlying optimism that can be seen in the very moderate but steady rise on the stock markets. Let's just hope that we are not in for any unexpected surprises.
Market intelligence
The leather pipeline continues to be in a difficult situation. Not only are we deep in the process of structural changes, we are also dealing with the dominant position of China.
Everyone in the leather pipeline is struggling with the problem that this huge market has become absolutely commanding. On the other hand we are fighting with the problem that the information flow - at least for Westerners - is still insufficient in their eyes, to base solid judgements on reliable market news. So we continue to deal with information which is more a reflection of developments, rather than actual news. Some will argue that the information about production and sales of the big consumer brands and retailers is enough to judge demand and production forecasts. We do not agree. With the leather pipeline being managed much more tightly these days, external influences have an increasing importance.
At present cash-flow problems in China as well as in Europe play a much more important role than anything else. While in Europe the cash-flow problems are evident by the rising numbers of late payments or even non-payments, in China we are facing a mixture between cash restrictions and the classical use of the familiar “not to respect contracts” which are concluded at higher price levels at the beginning of the summer. Even when many do not admit to this, we have reliable information that an increasing number of sellers are confronted with delays or even non-fulfilment of contracts. The usual excuse for this is that cash-flow is not good enough at present to honour contracts and shipping schedules.
While large suppliers can still cope with the situation due to sufficient warehousing and financial resources, many smaller players start to get nervous and have to watch cash-flow themselves. This puts them in a position of not being able to respect their own commitments with suppliers. This situation makes them increasingly insecure about the value of the inventories they are holding. Quite an explosive mixture for the present market.
What has now happened in the last two weeks which we have to cover in this issue of the market intelligence?
Trading was very light around the globe. Many suppliers were trying to talk the market up and make it seem more active and better than it really was. However, we believe some of the premium suppliers, when they speak about sufficient sales and shipments. They are definitely enjoying a much better time than others at present. The leather pipeline has by no means come to a standstill and many tanneries are still operating at normal volumes. Consequently, these tanneries have to make sure that the influx of raw material continues to be stable and safe and this is the time when they have to pay back the suppliers that supported them when supply was tight.
However, those who mainly trade material and look for the deal of the day, or who are not recognised as a stable and consistent quantity, face more and more pressure, not only as far as new sales are concerned, but also with their existing contracts. Although we would not say that this is the majority of the business, we know that in a volatile market nervous traders can be an influential factor.
As a consequence, global hide prices continued their moderate decline. In almost all major supplying markets prices tended to be weaker and we believe that many sales were not made at the levels of the official price lists. There were very few exceptions. Quality hides in Europe including fresh, chilled material were forced upwards by the butchers, who were still using the low production numbers of the summer to squeeze more money out of their buyers. We think that this is just temporary and will be corrected in the next round of business to be concluded pretty soon.
In the rest of the market - in particular medium and lower qualities - prices had to be marked down by sellers if they wanted to move any material at all. European buyers were not in a purchasing mood and the financial problems which are continually reported in Italy added to this reluctance. Asian buyers were mainly on the sidelines and upholstery tanners in particular decided to stay out of the market until they have finalised new deals for the next season. The upholstery fair in Highpoint held in October will give us a better picture as to how much leather furniture is going to be sold, and if the very low prices which are presently mentioned in the market for finished product have to really be believed.
Rising energy costs, increasing chemical prices, and more or less steady labour costs leave tanners with only the raw material as a way to adjust the price pressure for the finished products. It is, therefore, logical that tanners wait until the very last moment to decide what kind of raw material and at what price they are willing to buy. Since waiting does not increase the risk of not getting supplied at the moment, buyers feel that this is the best option for protecting themselves against the margin problems they are facing.
We still believe that in terms of volume the leather business remains fairly steady. It does not even need a great deal of optimism to be convinced that the total demand and the total volume of production are going to increase significantly for the remaining months of 2004. However, while suppliers have been playing the market successfully until the summer of this year, it seems that the pendulum is now swinging in favour of the buyers - at least for the coming weeks.
Only those suppliers with a very regular and successful customer base will be able to protect against the rising pressure. However, even they will have to adjust if necessary to any market eventuality.
The split business was also facing the same problems, but, in addition to this, news circulated of major bankruptcy of a split trader in Northern Italy. This highlighted the margin problems which we have reported already. Split prices in general were far too high and although many producers enjoyed the situation, economic realities cannot be ignored forever. So, split prices also came under pressure and lost various per cent against the levels seen before the holidays. We would not be surprised if this trend continues in the coming weeks.
The positive outlook for skins - which one generally had to share in the early weeks of September - could not be maintained. All kinds of prices are reported and a lot depended on the individual supply situation in the different markets. However, it is fair to say that the low point has passed and the skin market buyers are presently in a stronger position than sellers.
For the next two weeks we have to be cautiously pessimistic about the price trend for raw materials. Sellers will try to sell more than buyers are willing to buy. Consequently, the next weeks will place more pressure on raw material prices. Having said this, our regular readers know that we are not pessimistic about the demand for leather for the season to come. If this is true, then the present situation in the raw material market is just an interim phase, and if the timing is right there could be very good opportunities to make successful purchases in the next weeks.
Larger kills in many parts of the world, in particular in Europe, will most likely boost supply before demand can regain enough strength. If the historic cycles continue to prove to be right, the period between the end of September and mid to end October might offer a lot of buying potential for the profitable production of leather.
If raw material prices fall another five to 10% from the present levels we have to assume that most leather production is going to be profitable and will boost the volume of the trade in finished leather. It has never been wrong to anticipate market developments, and if someone has reliable information from his order book he would be well advised to get the wallet ready and to buy at a profit. The worst that could happen is that prices could continue to decline and this would mean that more profits would be generated when the leather production season is at full speed.
In short, one can say that for tanners who have looked after their customers, who have developed the right products, and are neatly tied into the supply chain can really look very positively to the near future.
