Macroeconomics 

The general economical situation has, once again, brought few changes. We see rising concerns about global growth which was reflected in increasing volatility of international stock markets.

International commodity prices stopped their increases and various products even retreated remarkably from their highs. Oil prices fell to a seven-week low end even reached levels below $50 per barrel before returning to the early 50s.  Consequently, the average level of energy costs remains very high.

The dollar lost ground once again due to the rising concerns that the US economy will not grow at the pace previously anticipated and the US consumer could slow down their expenditures. This was also reflected by American retail sales which in March were only up by 0.3%. The American trade deficit grew again to a record of $61 billion, which brought the twin deficits in the USA back to the focus of interest.

The automobile industry delivered a number of interesting news items, however, none were particularly positive. GM, the largest global manufacturer, had to report a large loss for the first quarter of 2005 and first rumours of a possible bankruptcy began circulating the financial community. Ford did not meet expectations either but remains in the black. At the auto show in Shanghai discussions were heard about the future of the Chinese car market.  There is no question that everyone is positive about the future outlook of this huge market potential but, at the same time, nobody has an answer for the massively rising overcapacity and how it is going to be readjusted. For the time being the situation seems to be viewed as ‘somebody else’s problem’. Yet, under the present conditions, the world has to expect that cars ‘Made in China’ and also Chinese brand names are going to arrive in the global markets. This is not good news for the labour force in the traditional car manufacturing countries and might reinforce already existing tensions in the globalised world.

What firs into this frame is the proposed USA law that if the if the Chinese government does not revaluate the Yuan in the next six months the USA will impose a 27.5% import tax on goods manufactured in China. It is hard to believe that this move is more than just an attempt to increase the pressure on the Chinese government to reconsider their currency policy. It also proves that the global free trade is much more than just manufacturing and marketing without any barriers. The Chinese membership in the WTO has definitely been a strong election slogan in the face of global free trade but one that can only work as long as currencies and tax incentives remain strong tools for governments in their competitiveness strategies. If not, the fiction of the real free trade will not become real and attempts to offer enough jobs in the individual national economies will further increase global tensions.

Market intelligence

After APLF, everything has now settled again and business has returned back to the normal routine. Travellers slowly returned to their desks and the trade tried to convert the impressions of the trips into decisions for the present and future business. It seems that the trips have not really offered enough news to influence the general market mood.

Trading activity was just as expected. Raw materials reflected the general situation in the leather market and so we are still confronted with the fact that demand commands prices in the arguments of negotiations, the majority of which remain in the hands of the buyers.

We might, however, be seeing a slow start towards a change. The most favoured raw materials in good quality and lighter weights have already gradually been turning the price trends around. Top quality calf and kip have over the last two to three months gained in some cases as much as 10% in value. Many were still arguing that the price pressure the buyers have been exerting will be the determining factor for ever.

Everyone is now carefully watching their own market segment as the increased specialisation has led to a proliferation of those. In any case, for the first time in a long time we have stabilised trends which are not on the downside anymore. While this has so far applied to the lighter weights only, there is a possibility that this trend could also spill over into other market segments.

The heavy bull hides in continental Europe have a decent chance to see a change in price trends for some time. With the sharply reduced kill after the end of the EU subsidies, the daily slaughter of this type of animal has simply fallen below the consistent and necessary daily soaking capacity of the key users of this type of material. Their ability to substitute this particular hide is limited and not only for quality but also for environmental reasons. Although many claim that in Ireland one can find a substantial surplus of heavy ox, they can only partly substitute a continental bull hide of over 40 kg. In addition, a lot of the excess short term availabilities are coming from export contracts and it is questionable whether they will be honoured by the client. This particular aspect also makes the suitability of these types of hides suspicious.

Coming back to the fact that in this isolated segment the supply is definitely lower than the demand end, the ability to substitute specialised productions is limited. The way in which this will be solved by the market will give us some interesting information about potential market trends when supply is not very high. In this particular case many informed sources tend to believe that the availability of heavy male material is going to be insufficient at least until the summer holidays.

Finding a market which is clearly undersupplied for a certain period of time, would provide a reference on how far hides can be substituted, how big the willingness of tanners to substitute is and whether the argument that the price for the finished product is only for the raw material is true.

We also believe that nothing is black and white and that with further progress of specialisation in the tanning industry more and more isolated price trends will be seen. This will certainly not make the life of the market players easier. Since the business has very few points of reference and the general global price reports cover only the key markets and the main price trends, its interpretation for all the members in the trade with their individual interests is going to be more and more complicated.

As an example, key players who are buying calf and kid leather will definitely not consider the current firmer market in comparison to the general weaker trend in bovine hides that we have seen over the past six month. They will have very little understanding about why, during the present fairs, suppliers will talk about the raw material price increases and, consequently, in combination with the rising production and chemical cost ask for higher leather prices.

A similar situation could occur with leather made from heavy and high quality European material if the trend of the slaughter and demand does not change very quickly. One thing, however, is clear: at the beginning of such a trend the producer of leather is going to suffer. He will have to absorb price rises long before having a chance to recover anything from his client.

Until today a lot of the price pressure had been compensated by falling raw material prices and it would definitely become a very difficult and complicated situation if raw material prices no longer assisted the calculations.

We might be pre-empting the situation as currently the market is still strongly impressed by the constant pressure on prices. Over the past two weeks many key markets had to carefully adjust their price levels to the real obtainable market levels. The American hide market, for example, slowly slid back to levels which had long been seen as a solid base of calculations. Prices around the $60 mark for the key grades of steers have long proven to be safe ground for tanners’ calculations. Dairy cows are now also entering the security zone which is in the area between $45 and $50.

Despite many quite pessimistic sales and shipments reports we think that the situation has definitely improved in the last week. Low kills, more activity and more shipments are slowly starting to ease some of the pressure on suppliers.  The medium and higher quality raw materials are certainly no longer burdened by any excessive production or inventories. They are also supported by the trend for better quality leather. Since the different segments of the market never move together, more positive signals are bound to come. For the problematic market segments, such as garment and leather upholstery, the situation is definitely not going to improve in a hurry, especially with the Asian suppliers starting to produce for the after summer season. As the European suppliers will follow suit shortly after their summer holidays, some light can be seen at the end of the tunnel.

Consequently, we have to monitor the situation carefully if the rumours regarding more shipments and inventory reductions are true and start translating this into real effects in the next weeks.

We do not expect leather prices to have a short term opportunity to go up in the general global retail environment but the short term influence of reduced supplies and a little change in the market psychology could stabilise or even improve the sentiments in the raw material markets.

The split market is still in the doldrums. This applies in particular to the medium and higher price splits, especially those deriving from European productions.  Tanners in Europe complain heavily about their reduced revenues from the split credits. Sales of medium and higher quality splits are still hard to obtain and it is difficult to get the right price for the material.  Low price splits with the dollar origins in particular are doing better, possibly finding enough demand to keep the market in balance.

The lamb and sheepskin market is full of rumours and gossip. More and more ‘secret news’ on mysterious buyers absorbing the large quantities of lamb and sheep through speculative positions are surfacing in Europe. This certainly clashes with the rumours of un-excepted documents in China and large inventories held by tanners in the main producing countries. As usual, where there is smoke there is also fire, so while these rumours may be true, it is only one interpretation of facts. The one thing that is certainly clear is that main European lamb and sheepskin origins have now reached price levels which make them attractive to many different uses. Consequently, many producers from around the world are watching UK, Irish, German, French and Scandinavian skins as their present price levels qualify them for many different purposes. Indeed, many sellers have been reporting increased interest in the last weeks. This is definitely good news because there have been large inventories of material accumulated over the last months. If they are now absorbed by the industry we can talk of a positive trend but not a turnaround for the market. One has to assume that, at present, this is more of a speculative move as the skins are changing hands rather than a substantial increase in leather demand. Cheap lamb will partly substitute other products and, tanners that are still disposing of cash flow will consider present price levels as an attractive opportunity to secure themselves against surprises in the raw material markets over the next season.

In the coming two weeks all eyes will be focused on Lineapelle, Bologna. From there, many people will try to find confirmation of a good market in shoe and leather goods and many will try to figure out what the fashion trends for the next season will be. However, we do not think that this show is going to deliver any main new trends for the market as such. Much more interesting will be the development of interest and shipments for the upholstery tanners in China. After the disaster last August, consolidation and signals of better orders could ease a lot of market pressure. So, under these circumstances, the market settlement would not come as a surprise and would definitely help ease some of the pressure experienced by suppliers, particularly in Europe, before the summer shutdown. We doubt that the really new trend of the raw material prices can be fully achieved but there is at least a fair chance that the general depression is going to be lifted and more confidence can be established once again in the leather pipeline.

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