Macroeconomics

 

The last few weeks have not been particularly exciting as far as the general financial markets are concerned.

 

The only thing one can pinpoint is an increasing nervousness in the markets and continued excess liquidity. The stock markets are seeing strong correction on some days and rebounds the next. Investors who have already made good profits are willing to sell in the light of rising interest rates, while a number of investors who missed the market are now taking chances and pouring their money into stocks when they feel they see more attractive levels. And so the indices are bouncing up and down, which is usually a warning sign.

 

Interest rates are continuing to rise and we also saw the ECB finally increase interest rates in Europe by a quarter of a percent while in the USA analysts can still not agree on where American interest rates are heading. Most believe that the market is going to see further interest rate rises and the 5% mark is taken as the target at present.

 

The question remains as to where all the excess global liquidity is going to go. Investing in production is not very attractive these days and as a result investment has become more a question of money generating money rather than investing and turning money into capital. Takeovers and mergers, and buy back stock programmes are the focus of media attention at the moment and very little is heard about new exciting products or the expansion of production capacities.

 

Inflation to weigh heavy

Consequently, inflation is eventually going to become an increasing problem, especially when the world decides it is no longer willing to finance the US consumer, and money and other investment opportunities have to be sought.

 

The US trade deficit has widened further and, in the meantime, the financial markets have become so used to it that they no longer even pay attention to the figures. The good news from the US economy (i.e. better than expected data from the labour market) is dominating the headlines and sometimes one gets the impression everybody is turning a blind eye to the tremendous risks and imbalances that exist in the global economy.

 

In the meantime and for the short term things still look reasonably positive and nothing seems able to depress the world’s economies at the moment. The tensions in the Middle East have, for many, become just daily news reports rather than anything that is preoccupying their thoughts and lets hope the situation remains this way and does not come into the foreground again soon. Oil prices are currently settling around the $60 mark and this is not worrying anybody either —this may change though once consumers in the Northern hemisphere receive their fuel bills for the last winter.

Market intelligence

 

Tensions in the raw material market continue to rise. The assumptions we made in the last issue that market activity would slow down until the trade gathers in the Far East from mid March to mid April proved to be wrong. Buyers were not yet willing – or in the position – to refrain from the market and continued to actively cover raw material.

 

The US has delivered strong sales and exports for the last two weeks and European sources have also confirmed that interest and sales continued at a strong level. Some markets were already reporting shortages and volatile regions, such as the UK, saw prices jump by up to 5-7 %. This was once again a good example of how tight inventories are and consequently how nervous and sensitive things can and have become.

 

Supply-driven market

This situation has also proved how market conditions have become supply-driven again. Selected large accounts in Asia have sourced hides by price rather than quality and value and the target prices they had left with their suppliers allowed only UK and Irish hides to be in the supply basket. By the size of the orders, the low kill and the inventories levels, stocks were quickly used up and when local consumers realised the situation, and the fact that their supply commitments could be at risk, they had to follow this and as sensitive as these markets traditionally are, prices soared.

 

Other European markets were less excited, but demand was also better than most players had expected. On the European continent there is probably more concern than anywhere else in the world. This is related to the strong foothold automotive tanners have in the extra heavy male market - as long as they can keep it. For the rest of the market, it’s back to the pre- 2005 pattern. Thanks to stronger and more consistent demand from Asian traders, many are seeing opportunities again and many names that had all but disappeared are being mentioned once again.

 

Increased confidence

At the end of a classical market cycle with moderately rising prices, traders feel confident and see less risk. It is not only market and price movements that bring them back into play in the hope of generating margins, but also the ‘spread trading’ made possible by large price differences between a number of European supply markets. This is a chance to profit again from the trade restrictions which still exist, particularly concerning China, where customers either do not have import licences for selected countries or imports from certain EU countries have not yet been legalised. This seems pretty illogical considering that health regulations and certificates have already been harmonised for a long time, but it is still a market reality and another example of so-called ‘free trade’.

 

For those who are willing to take a risk, in the hope of making a profit, this situation offers a new and attractive chance to get involved in trading hides. At the end of the day buyers have to weigh up whether the goods that have been delivered offer them more of a benefit for the money they have spent than the money the seller has received and invested.

 

As far as general market trends are concerned we are indeed surprised by some of the US reports that are circulating. Some have been quoting limited and patchy trading for some time, but the official statistics have delivered a completely different picture. The total numbers sold and the outstanding sales figures speak for themselves and have been reflecting a situation where sales are exceeding supply for some time.

 

Mixed reports

Although mentioned a number of times before, everyone writing reports and trying to analyse the markets has to understand that we will never be told the whole truth about the daily or weekly sales and business activity. And why should we be? So, we only have a limited number of reliable sources and figures that we can run through to try to get to come to some ‘valuable’ and plausible conclusions. The vast majority of today’s global supply is controlled by first-hand producers who are not particularly interested in sharing market activity with others, because they don’t see any individual benefit from this. The same applies for the key buyers. All they wish to do is gain control and benefit from their individual market share and this creates a small ‘members only’ club across the globe. Press or other outsiders are the last ones to be accepted by this elite group.

 

Consequently we have to continue to put together the pieces of the puzzle from around the world from a more objective standpoint and to use our position of not being personally involved or having to follow an individual budget or target.

 

Enough philosophy! Apart from the general market activity, we found it very interesting to hear this week that the Argentinean government has imposed a 180-day ban on the export of beef due to rocketing domestic prices. Since local consumers were no longer in a position to afford beef, and in terms of preventing tension, this came as a surprise. We find it hard to calculate what this is going to mean for the hide markets. For the global supply there will be little effect, as what Argentina does not supply to their export markets will be quickly filled by others.

 

It is also questionable as to how the global trade community will react to this. It is not really a good example for free trade. The consequences for the hide trade will also be limited unless the slaughter is reduced substantially, which would lead to a substantial supply problem for local tanners that, in the short term, would add to the global inventory problem.

 

Reduced inventories

The split market is also slowly but surely entering into a situation where inventory is substantially reduced. It is now in a similar situation to the hide market, but it took a while longer to occur. Prices haven’t reacted much so far, but it is only a question of time before the split market gains some momentum from the present situation.

 

The skin market has gone reasonably quiet. There is increasing interest from the former CIS countries for lining materials. They are desperately searching for economical, large, dense and suitable woolskins and there not many available in their price and quality range. The Chinese have satisfied their appetite for low-priced ‘long wool’ skins and are staying out of the market, because their purchasing period is presently over. The Turkish market is waiting for the new season’s skins in Europe and is desperately waiting to see how they will be priced. It remains a market anomaly that global skin prices are still running at a spread rarely seen before. There are still plenty of cheap skins available in Europe while the privileged origins have already been at reasonably high levels for a while. As usual this will be sorted out eventually by the market.

 

 

Future unclear

For the coming weeks, running up to APLF in Hong Kong, we can expect much of the same. Perhaps the leather industry will continue to need more hides and this will be the final trigger to push the market higher. However, we have seen this situation before when the market got overexcited around the Hong Kong fair and sellers ended up losing a bit ground. In our experience it has never turned out to be a good thing for the market and business in general. However, we should not forget that at present it suits everyone, in spite of the future consequences. Sellers are happy for obvious reasons, but buyers (tanners) are pleased as well, because this is giving them the necessary arguments to negotiate prices with their final product buyers. It has also always been our opinion that prices find their upward potential in an inflationary environment. However, although this could preserve the present market momentum, it would also increase the sensitivity to a market turn as well as for a change in the mood of the global economy.