Macroeconomics

The last two weeks produced a great deal of mixed financial data and everybody was left to interpret it in their own way. This resulted in quite a few puzzling developments.

What we find particularly interesting is the continuing rise in oil prices. We have now touched $66 per barrel and, with the firm market at present, we would not be surprised if prices continue to rise further. We cannot believe that this substantial increase in oil prices is based simply on supply and demand, and one has to at least consider that a decent amount of speculation is also part of the game.

Assuming that oil prices stay high into the winter season, it would be completely naïve to think that this will not have a negative effect on business and consumption. For the time being, however, stock markets are in no way feeling negative and the markets in the western world continue to remain very firm.

The American central bank increased interest rates by another quarter of one per cent which did not come as a surprise and was completely expected by the financial markets.

Forecasters are again predicting that the European economy will be doing better by the end of 2005 and are waiting for expansion of economic growth in Europe.  Well, we have heard this many times before and let’s see if the oracle gets it right this time.

The US dollar is continuing its descent against the euro and the yen, and has lost a number of percentage points against the other leading global currencies in the meantime. While to many, particularly in Europe, this has come as somewhat of a relief from the last six months when the dollar was trending firmer, we will have to see how the economy will cope if this descent continues or even accelerates.

Whilst we painted a fairly positive outlook for the global economy in our last issue of the market intelligence, we have to admit that we feel there is good reason to be a little more cautious about the situation in light of the recent developments over the past two weeks.

There is definitely a good chance for stable development in the second half, but the ever increasing oil prices and a weaker trend in the US dollar could harm not only consumer spending in the United States, but also weigh heavily on the global economy.  At the end of the day, there is going to be a heavy burden on family budgets when energy costs and car fuel prices start to eat away at everyone’s income.

Market intelligence

At present we are right in the middle of the holiday season and, as a consequence, we have no other option than to shorten our summer reports.

We couldn't find any global market where business activity was not substantially reduced.  Even in those countries which do not traditionally close down for the classic summer holidays, such as most countries in Asia, activity slowed down and mirrored that of the holiday season in the northern hemisphere.

In the western world we are now at the peak of the summer break, and although in the United States and in northern Europe some companies are returning to work, the bulk of players are still on holiday and will not return until the second half of August. As usual, and this year is no exception, many people are once again excited about what is going to happen when people return to their desks.

Well, what will happen? The short answer is nothing. Tanners have already organised their business for the first period after their return and the last thing they are thinking about is jumping into the raw material market when they have so many other things to worry about when restarting production. The industry as a whole will head off to Shanghai with the usual high hopes that buyers will be queuing up and everything will be extraordinarily positive. And, once again there is a high probability that they will be disappointed.

Under normal circumstances everybody will sort out the leather market in September and October and only by the end of this period will orders be placed and producers have the necessary security to run them on a reasonably stable basis. This means there is quite a long way to go until we really have a clear picture about manufacturers’ and retailers’ plans and expectations for the rest of the year.

Well-prepared

As mentioned above, trading was pretty light over the past two weeks and it is quite obvious that everyone who had to make preparations did so prior to the summer break. This applies not only to the buyers but, as a logical consequence, also for the sellers. Consequently, the big players on both sides are fairly well prepared for the weeks to come. One just has to look at the available sales in the export statistics and it becomes pretty clear that many have already made the necessary arrangements.

Traders, however, are not in this situation and it does not leave them with very much to do. There were no sellers desperate to find somebody for their product nor were there any buyers desperate to find somebody willing to sell to them and consequently prices didn't move. No activity, low price movement, what could be more boring?

Changes in Europe

If somebody had been looking for some kind of excitement he might have been well-advised to have had a look at the continental European abattoir market. In the region of the Alps, in particular, there was some excitement to be found. The aggressive expansion of the Dutch group ‘Sovion’ into the German abattoir market and the rapid integration of hide processing and marketing has shaken the situation in this area up. Established processing operations realised that their raw material base was slowly but surely disappearing and with the purchase of a local processor by the abattoir group nobody was left in any doubt that the traditionally structured businesses in the region were history.

This triggered a tremendous run on the positions for the future and gave packers a sweet time when it came to price negotiations for the summer period. With some tanners who depend - or at least believe they depend – on this type of product acting quickly, the road was paved for some substantial price increases which in our view go against the present trend a bit and may be premature. This has at least increased the sensitivity and volatility of this particular market and everyone who is affected in one way or another and dependent on this, has become pretty nervous about what the future is going to bring. This certainly applies to the high end and automotive tanners and in part also to high quality upholstery and vegetable tanners.

It seems that the restructuring process occurring in continental Europe is not yet finished and there might be some exciting times to come over the next year or so.

In the rest of the world and in other markets we could not find anything of any particular interest. A rumour here and some gossip there, but nothing really of any substance.

Sheep and lambskin remain slow

Some are trying to make the market believe that there is a recovery in interest for medium and low end sheep and lambskin, but this has not been confirmed through any significant trading activity. When it comes to business, buyers are still claiming that they can buy at very low levels and the garment business in particular is said to be pretty poor. Some European suppliers claim that they have had an increasing number of phone calls from Turkey, but this could just be a case of wishful thinking rather than anything else.

However, in this area too, it might be a little too early. It is true that Turkish tanners have much less inventory this year than they have had in previous years, because they simply did not buy the same volumes at the beginning of the lambskin season that they used. This was definitely a wise move as they have burnt their fingers many times before by taking a raw material position before having confirmed finished product orders.

For the coming two weeks we still expect very low and slow business activity. After that we should be through the holiday period and the last week of August and the first week of September should give us some indication about the developments to expect in the near future. For those manufacturers and raw material suppliers in the non-US$ areas, a lot of their business success in the second half will undoubtedly be related to a lucky hand in the currency market.  We did not believe that the dollar would make any significant moves over the summer, but we were wrong. One thing is nevertheless true - although it has nothing to do with financial science - over the last three years the dollar has always lost a fair amount of its value in the second half of the year.

None of us can forget what happened in the second half of last year and all we can do is hope that it does not happen again because it will harm quite a number of leather-related businesses outside the US and Asia.

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