Macroeconomics

The last two weeks delivered conflicting financial news, so that no clear picture on the future of the global economy was delivered. However, the international stock markets reacted positively.  Despite some small tremors in Japan as a result of a court case being brought against a very prominent Internet company, the upward trend continued on the international stock markets.  In Europe in particular, and in Japan, shares rose and stock markets reached levels that have not been seen for the past three or four years.

Statistical data from the United States was mixed. The GNP for the last quarter of 2005 had to be revised to 1.1% when expectations had been for it to exceed 4%. Despite a weaker housing market consumer sentiment remained strong and rose to the highest level since last July.

In Europe it seems that the lame-duck, Germany, now looks in better shape. Whether this is down to pure optimism or more fundamental reasons remains to be seen, but there was promising news as the IFO index, which measures the business outlook for about 7,000 companies in the country, delivered the highest index since 2000. This offers some hope of better consumer product business.

Currency market remains volatile

The currency market remained very volatile. The dollar reached 1.23 against the euro before falling to around the 1.21 level again. This points to a weaker dollar in 2006, but we believe that this high volatility will continue for some time.

Oil prices fell and then rose again and also remain without a clear direction.

Political tension in the Middle East increased with the Hamas party’s victory in Palestine and aggressive statements made by the President of Iran, which have threatened the safety and stability in the area.

China delivered very positive economic news again and the growth rate in the country remains at a stable figure of around 10%.

Market intelligence

The last two weeks were far more active and interesting than we actually thought. A number of trade fairs took place and at the end of the day almost everyone said that that they had been more successful than most expected.

The shoe fair in northern Italy saw many smiling faces and both visitors and exhibitors confirmed that order volumes and the future outlook were very positive. The shoe business remains on a strong track globally and raw material supply for certain fashion trends remains the only worrying factor. This has been an issue for a while, but it seems set to continue as the trends for next season and next winter are set to favour lightweight kips and calf again.

This type of raw material has already been in short supply for the last six months and consequently the situation will be no better in 2006.  It may be even worse as the inventories that were available last year will not be available this year. One can only hope that shoe manufacturers and retailers will allow their suppliers to use other alternatives for this kind of shoe production.

The upholstery fair in Cologne also left many exhibitors with a positive impression. The German market in particular conveyed the idea that the consumer is willing to get back to the shops and buy medium and higher quality upholstery.  This now needs to be confirmed by shopping activity in the summer and into the last quarter of 2006 when the shopping season for furniture is at its peak.

The leather fair in Istanbul, Turkey, was also a success. Maybe not for those who were looking for products at the medium-to-low end of the range, because most Turkish tanners and manufacturers have realised that they cannot compete with the production and prices from China. These tanners have invested money in developing better quality products and exhibited some very nice, light leather garments. The general impression reported was that the goods and the prices were well received by customers and Turkish tanners and manufacturers are looking forward to a more positive year in 2006. This only applies to the top end of the range as others will continue to struggle and it is doubtful whether they can compete with cheaper products from the Middle East and Asia.

All in all, we are of the opinion that 2006 could well be a better year for leather consumption was confirmed.

Pricing becomes more problematic

This makes the issue of profitability and pricing even more problematical than before. Despite all of the positive news  hardly anyone in the leather pipeline, at least as far as leather production is concerned, is happy with current levels of profitability or the outlook for the months to come.  Production costs are rising, customers are becoming more sensitive over quality and, at the same time, the pressure on finished product prices persists and negotiations remain very tight.  There is no news on how or if this will change as yet.

With the overcapacity that exists in global leather production some tanners should probably be a little wary, but for those tanners who have got the right product and can meet the demands of the customers should not worry too much and should have more confidence.

With the more positive outlook for leather, and the fact that substituting products is also going to raise prices, tanners should have more confidence in their price negotiations. This may sound easy, but it is not so simple for those who are sitting with their clients while they pretend that they can get everything they want at the price they want from somebody else.  Many ‘cheap buyers’ have had their fingers burnt over the last few years in the endless hunt for the cheapest price when delivery times or quality did not meet their requirements and the problems caused by this probably ended up being much more expensive and cancelling out the cheaper price they thought they had negotiated.

We certainly still have to eradicate a lot of the overcapacity before sellers can really get back into the driver’s seat, but many tanners should really have more confidence in their position now to ask for a fair price for the product.

If tanners cannot handle this, many of them will run into trouble with raw material suppliers for the same. In the last year raw material markets have been very stable and in the end the buyer always had the upper hand and could buy at the right price whilst getting what he needed. There was no room for much of a margin, as there was never a shortage of raw material. However, this could change in 2006 for some raw material categories at least, as long as we do not see any exogene influences on the global consumer markets. The tensions in the Middle East and the possible consequences for oil prices should not be ignored.

Heavy bulls buck the trend

Heavy bull hides for the European automotive tanners are in a contrasting situation to the general market situation. Despite the rock solid presentation of raw material markets and the good clearance of raw material production, this particular section continues to be at an impasse. In the past these tanners were in a privileged situation and hides over 40 kg delivering sizes over 65 sq.ft were so prominent that they fetched large premiums for many years.

However, many tanners in this field have been commenting on the change in the tone of the market for some time, a change that many players in this market did not believe.  The steady demand for luxury cars, from Germany and Japan in particular, did not indicate that there would be any change or price pressure in this market segment. However, it seems that many tanners have now had to take price reductions for finished leather as price pressure from the automotive industry has limited raw material prices and that newer finishing technology allows more varieties of raw material to enter this particular market sector than ever before.

Many in the trade are finding it very difficult to accept this situation and some packers and raw material suppliers are still not willing to face reality. This makes price negotiations and provisions, particularly in the central European market, extremely difficult at the moment.  We believe that the coming three to four months will clarify the situation, which is needed in order to put prices back on safe ground.

The split market did not deliver much interesting news.  Demand seems to have increased a little because some articles seem to be favouring splits again. Nobody is really complaining about sales and prices in the market seem pretty stable.

Skin market remains optimistic

The skin market continues to be on more optimistic ground at the moment. The sentiment from the fair in Istanbul and the round of buying from Chinese tanners is supporting the raw material market at present. Good quality merino skins, high quality double-face and top end nappa are selling very well.  The neglected average quality European skins are also finding more interest from China, but they are the main reason that wool is making a return. Wool prices are pretty firm and the demand is quite stable. Most buyers from China are now on holiday and we have to see if demand resumes on their return. If this activity continues one can be optimistic for the future of skin prices in the coming month.

The outlook for the coming weeks can only be stable. Chinese buyers are taking their vacation and since they are the driving force behind the general market trends very little can be expected as far as prices are concerned.  Sellers have sold what they wanted to sell and buyers have bought what they needed to buy, for the moment at least. In Europe it will be interesting to see how the automotive tanners act and if there will be a surplus of heavy hides burdening sellers.  If the sellers don't find enough buyers the price movement of this particular material could be in contrast to the general trend. The market will get a final impression about shoe business from the fair in Chennai, India.  If this also highlights the positive demand situation for leather shoes, all hides that are suitable for this particular product should be on rock solid ground as far as prices are concerned.  But, on the whole we have to believe that price movements in the weeks to come will remain in a very limited range.

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