Side leather continues to do well
Macroeconomics
The euro is - for the moment at least – in a phase of adjustment. Within the last two weeks it fell to about 1.20 against the dollar and has failed to break this mark even after the EU budget negotiations nearly failed. We will have to see how the currency markets will react to the political crisis that occurred over the weekend and how this fundamental crisis will affect the fragile dream of a stable and a united
On Friday the euro even managed to recover almost two cents – back to about 1.23 – when the
Anyway, any clear and new direction is definitely not set yet and it remains to be seen over the next weeks if this is more than a technical reaction. It is likely that our previous statement that the trading range over the summer is unlikely to see much increase remains valid.
Oil prices rose significantly and prices are close to the records reached earlier this year. The vast majority of experts are predicting further price rises due to the summer season through increased travel and the use of air conditioning. Provided that energy prices remain high and the US$ does not return to the levels seen at the beginning of 2005 family budgets will again be strained and for the next winter season additional reserves will have to be built up that could weigh heavily on consumer spending. Prices at fuel stations are already absorbing significantly more of the family income.
The move of production and the state of the global economy was again proved by the increase in industrial production in China (+16.6 %) and India (+8.8 %).
Market intelligence
The past two weeks saw a continuation of preparations for the summer break. While in Europe the activity in the leather pipeline became more and more holiday oriented, Asia showed a much better performance and with the lead times for shipping the activity was distinctly better than in the rest of the world.
Side leather is still doing much better than furniture upholstery and in automotive one has significant difficulties to establish the true picture. Sales in Europe and in particular in Germany were better in May and most of the Japanese and Korean brands are also doing better, while the US giants are still struggling.
The trend of the market becoming increasingly segmented has continued.
As already stated in one of our previous issues, fashion is the driving force behind the dynamic and less dynamic sectors of the market.
The strongest performances are still being delivered by the luxury accessory, handbag and shoe sectors in general.
There is still ‘drama’ to be seen, in particular in the garment segment where bad news is being delivered from areas of the world that produce leather garments exclusively and no indication of any improvement is forecast. Turkey, China, India etc. are not yet reporting any increase in garment orders, neither for nappa nor for double face. Many are still saying that it is too early to judge the next season, because the final decision and the orders for the second half of the year still need to be or can still be placed. At least in Europe men’s leather jackets are absolutely out of fashion at the moment and ladies fashion has not maintained the performance seen or indicated in spring/summer 2004.
Consequently, the medium price manufacturers in Korea and Turkey, in particular, are suffering most while in China the biggest problem seems to be more the overcapacity rather than the business as such. Any business that is still available in the market today is mainly in China and to a smaller extent in India and Pakistan.
In furniture upholstery we always see the period of the lowest activity in June/July. In Europe production is slowing down rapidly due to the summer slowdown of consumer activity in the furniture sector and the upcoming holidays. In Asia the lead time is a bit longer, but this is also only picking up for August. This is also reflected in reports from many raw material suppliers in America and Europe who are reporting decent demand from Asia which can be also seen in the development of prices which, contrary to most concerns, have held steady or have even seen a firmer trend for some grades.
While the leather business has been analysed and discussed in recent months and very little indicates that major changes will be seen over the summer, the bovine raw material might be an interesting field at the moment.
Against most predictions the traditional raw material markets were reasonably steady or – in the case of the US market – even firmer. So, we might have been a bit hasty when we recommended at the beginning of the year that you should take any chance of serious bargains. However, honestly speaking, price variations in US$ raw material prices have been very limited within a range of no more than 10% and this is nothing that can actually considered to be a serious factor in the market. The result is that tanners lose interest in following the raw material markets and monitoring fundamental changes. Most tanners have taken and are still taking it for granted that their raw material supply is secure and enough alternatives are available.
However, the situation has been quietly changing in several parts of the market. It has been seen to a lesser degree in terms of process, but is nonetheless evident. The reason for this is that this development has been seen mostly in isolated areas and in particular in the higher quality price segment. With very restricted supplier and customer bases, raw material producers remained reasonably cautious with their pricing policy. There was a far greater interest in maintaining the customer base to secure product flow, to protect against the generally negative price trend of recent years and not to take too many chances with new clients. This has, however, also given clients the impression that they are so privileged that they have a guaranteed raw material supply base with no risk.
As an example we can use the markets for fresh and heavy hides in Europe or for lightweight materials. Not only has the number of hides declined due to reduced slaughter as a result of the altered subsidy policy, but we have also seen a declining trend in quality due to the change in the farming structure and consequently a fundamental shortage of availability. This is exacerbated by the changes in the supply structure with a strong trend to more concentration and a rising number of slaughterhouses starting or looking into the direct marketing of their hides.
This has led to significant problems in the supply of these particular grades and a number of tanners have run into supply bottlenecks. Nobody is talking openly about it and business is continuing, but a lot of calculations no longer fit because the alternatives usually do not perform the way the original does. The answer is normally to buy (if at all available) either more expensive material or cheaper product which produce disappointing results and the problem of creating an inventory of lower grades at deflated values.
Now one may ask what the moral of the story is. Well, none of these trends can be said to be a surprise. While the future on the supply side (heavy, fresh males) was known, the limited supply was also not a secret. Consequently there was plenty of time to take all kinds of action to protect the sector and to prevent substantial difficulties.
This small part of the global market and its present problems may not interest too many, but it may be taken as an example for not taking the raw material supply base for granted and as something that can be moved down the list of priorities too much. Sometimes this can end in sudden surprises.
The split market has remained reasonably calm over the past two weeks. However, there is a certain underlying interest in the market and similar to the hide market this is mainly for the bottom end of the price range or for the hard-to-get items at the very high end of high substance and heavy splits. In this market segment we are also still in the seasonal doldrums and one cannot expect too much activity in the weeks to come. This might change later in the summer when new and clear directions in the leather market may be defined again.
The skin market remains extremely difficult. At least for everything related to garment leather in the medium and lower quality range.
Interest for this type of skins was hardly visible and although there are still a lot of talks about sales of skins around, we doubt that any substantial trading has taken place. The only interest - and this can also be seen in prices - is still for lining or for high quality luxury garments as well as in the nappa and the double face sector. The outlook for skins is not particularly good and the only thing that could rescue the market in the next season would be a renewed interest from designers for leather. The price argument at present levels would definitely not be the essential problem.
In the coming weeks we expect further problems in the markets. Market tensions are rising at the moment with the market for hides suitable for higher quality shoe and upholstery being pretty well sold and not in abundant supply. On the other hand we have leather as a commodity in upholstery and garments and here we would consider there to be a fair surplus of suitable raw material being on the market and looking for homes. These situations are likely to become more pronounced over the summer. So, the trend that raw material prices might drift further apart is likely continue until fashion, design and economic constraints force the market players to react again.
