Macroeconomics

Well, now it is decided that we, the world, have to deal with four more years of the Bush administration – and the consequences.

The US dollar continued its steady decline as the financial world showed its concerns about the  deficit created by the Bush administration. It has to be expected that Bush’s policy is unlikely to concentrate on the deficits and their consequences in the years to come either.

This can’t be good news for the rest of the world. A continued weak dollar will add to the economic problems in Europe, where the situation in the main economies still depends pretty much on exports, and consequently also on the value of the euro. The economic implications are pretty simple: either reduced exports due to falling competitiveness, or more manufacturing abroad to reduce the dependency on currency issues. Neither alternative is good news for the job market in Europe. The Japanese will not like the situation either and eventually more currency interventions could be expected.

The rest of the world will be less excited about the currency situation. Most Asian economies are so tightly linked to the USA, that most of the business activities are only calculated in US dollars. The Chinese do not care either way, because the RNB is pegged to the dollar and so Chinese exports will become even more competitive than they are already today. Consequently, the members of the euro zone will pay the highest price - and this is exactly what the Bush administration wants at present. Those countries (Germany, France) which have not joined forces for the war in Iraq will be hit the hardest and this can be seen as an adequate economic sanction for which nobody can be blamed politically.

In the meantime, many of the hopes for an economic recovery in the euro zone have been destroyed by the European Research Institute (ZEW) which published its outlook for the EU-economy. Its index fell by a whopping 13.9 points to a low of 31.3, based on fears of the impact of high energy costs and also of the high value of the euro, which could destroy the only positive force in the EU economies – exports (see above).

If one wanted to find something positive in the last two weeks, then this was the fall in the oil price which dropped almost $10,00 a barrel from the highs, but still remains above $40,00 – way above budgets. Also stock markets welcomed the Mr. Bush’s victory and most indices have gained over the past fortnight.

If one looks at the bottom line, it has to be concluded that the concerns about the global economy are much higher today than they were some months ago.

Market intelligence

The predictions we made two weeks ago seem to be close to the market reality. Hide prices in general continue to lose ground and raw material price levels have extended their slide.

It is more difficult than ever to obtain a clear picture about real hide prices. Most available reports and price lists do not show the change over the recent months. And it is questionable as to how much they reflect market reality at present. From what we can gather - not only from the position of the sellers, but also from talking to tanners - the situation is not exactly what is shown in public. Sellers and in particular the big slaughterhouse groups are trying to hold prices up as much as they can. In doing this less information from fewer sources is available to the market.  With fewer hides being ‘traded’, the influence of the ‘trade’ continues to fade and with it a public reflection of the market realities.

More than ever, it seems that there is a massive discrepancy between prices and sales volumes, and many do not realise that we are in a phase, more than ever before, when specific hide types go their own way and can no longer be considered a reflection of the general market trend. When we take dairy cows as an example, most of the publications are still mentioning market levels which no longer correspond with the written description of the market activity. In other words: the prices quoted can never be the level of trading in representative volume.

The biggest problem, however, is that many are still trying to generalise market trends. Weak, steady or firm are general statements which – in our view –no longer describe the market reality.

When we look at the facts we have isolated markets. Taking the positive segments into consideration as well, then one can say that hides which are suitable for heavy vegetable leathers, for example, are enjoying very high demand today and in some cases are already in short supply at the levels which are quoted as the market level. Taking, at the same time, hides of a similar description in weight ands sex, but that only qualify for upholstery or automotive use -because of their shape or the flay condition - then all of a sudden a much lower price applies. Since many are not considering the real market prices for similar hides, prices are being driven further and further apart.

So, certain hide types are now coming under a certain re-evaluation in the market. Taking again the standard dairy cows from Northern Europe as an example, they were viewed as a medium quality hide which were priced more highly than economic origins. Today, however, the leather market no longer  absorbs or simply pays a premium for a medium quality furniture leather, and so prices start to re-adjust in a downwards direction and find themselves in a similar price band as the low end economical hides, such as those from the Southern hemisphere.

With demand for alternative uses such as garments also dropping, traditional supports are also fading if not disappearing and so there is little that can save these types of hides from a standard low price valuation.

This should illustrate as an example that we have probably entered into a period of re-evaluation of certain hide types according to the change in the general leather markets.

However, it must also be repeated that the changes are not that dramatic, despite many calling the markets weak or difficult. When we compare the situation with that exactly a year ago, then most prices are back to where they were, and this would close the cycle. Suppliers from the euro zone just have to take into consideration that the US$ is about 20-25% lower and they must accept that their prices in euros do not yet completely reflect this. Since the correlation is not the same for all types, it is not fully evident yet.

We also have to deal with another change in the market which we have mentioned before - the inflated enthusiasm about the progress of the Chinese tanning industry and the influence and potential of the domestic Chinese consumer market. Neither the furniture, the garment, nor the automotive market have come anywhere near to fulfilling the expectations most people had for this area of the world. The pipeline is always filled with expectations, and on the basis of budgets, the raw material market in first half of 2004 was driven by expectations and positive budgets which have needed to be reviewed since July and have now been re-adjusted to reflect the true situation.

This applies far less to the shoe markets where the concentration of production and the natural global growth is cushioning demand much more than in the furniture or garment sectors - where fashion has a bigger influence and purchasing decisions are based less on daily needs. The final shot in the arm came from the automotive pipeline where budgets and supply chain decisions are having a much more direct and extended influence on the market. It is pretty obvious that in automotive production, in particular, the decisions of the global players in automotive leather production are much more currency driven than in the other markets. Reading the reports and strategy bulletins of the automotive industry and the sub-suppliers, one can clearly understand the trend to not only move the production of components to lower cost countries, but also the leather production.

Automotive had as such continued to be a sector where medium/higher quality hides still found a home at adequate price levels; however, as a result of this present trend, automotive leathers are now also integrated into the global situation of two price markets, i.e. either luxury high or mass production low, which in particular hurts the raw materials determined for this production.

The only segment in which we are able to discern some difference at the moment is shoe leather. Despite all the talk and complaints about the price situation, an increase in demand for medium and better selections for the next summer season can be clearly seen. Asian tanners who don’t normally even consider European hides, are sniffing around in an attempt to find hides which can compensate for lower selections from the USA or just in the hope of getting better average selections for the certain leather types that they need to produce. However, the volume of this interest will not change a market trend.

The split market also continues to be in the doldrums. Due to the availability of more and cheaper hides and grains, the demand and prices for splits are presently falling. Not even falling production in Europe has had a stabilising effect as yet. The globally increasing demand for gelatine and collagen alone is supporting the present trend towards lower prices.

We are waiting with bated breath to see how the increasing demand for lime split components will be answered by the falling supply from the traditional European tanning industry. How the world is changing can be seen in the European market where we see increased production in Asia – in China in particular; and more fast and convenience food consumption, all of which are leaving their traces.

Sheep and lambskins remain in a very difficult state. Demand hasn’t improved and hardly any positive news was delivered from the leather garment market. While there is no positive news from the retail markets in general nor from an improving situation in Russia, it is unlikely to expect any major upturn in the near future. The only glimmer of hope is the ending of Ramadan which might help a little. Consequently, we expect the market to remain under pressure, although prices for many types of skins can’t fall much further because they have already reached pretty low levels.

What shall we expect from the coming weeks? For the time being there is no evidence that the generally depressed situation will improve soon. Supply at this time of the year is abundant. The Christmas break is coming soon and is then quickly followed by the slowdown in Asia due to the Lunar new year festivals. For the moment, the market is entirely supply driven and with the present market conditions, there is very little chance for sellers to obtain more for their raw material. Quite the reverse is true, as there is a fair chance that some need to liquidate inventory and might be forced to take less money in the coming weeks. So the weeks until the end of the year should still see the buyers with the upper hand. When one, however, looks a bit further ahead, we have to keep in mind that, in Europe at least, the slaughter numbers have to be expected to fall substantially with the start of 2005. Although many in the trade are not impressed by this news, it should be taken into consideration for the plans and budgets of 2005. For those who can and/or want to plan their business further ahead, it should be taken into consideration. In any case currency issues will be in the foreground of short term market developments. We continue to recommend taking chances as long as they are there and there might be some more available until the end of this year.

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