Macroeconomics

Right from the outset when we began this service offering information about the leather pipeline, we have always started the report with an overview of the financial and macroeconomic situation. In the report, the hard facts are mixed with a little opinion to offer an insight into the current situation. This is done in an attempt to highlight the fact that the changes in the business and financial world can sometimes have far more influence on the overall situation than the little micro-world of hides, skins and leather.

Many of our readers at that time questioned if this part of the market intelligence was of any real value to them. However, over time, many of our colleagues have also started to include general economic information which gives us the impression that many people now understand the relevance of this and appreciate the need for a quick round-up in order to get a feel for the external influences which can affect business. Sometimes it is more important, sometimes less so.

At present, we feel that the economic situation and the changes taking place in the financial world could become more important to the future of the leather pipeline than they have been for a long time. We can now find out what’s happening in the markets every day, in newspapers or on TV, but with this information overkill sometimes the fundamentals get a bit lost. As a consequence we would just like to draw our readers attention once again to the fact that, in the short-term, the global economy looks very bright, but for a medium- to long-term evaluation nobody should ignore the three critical factors that we have to deal with at present: rising interest rates, increasing inflation, and rising energy costs. For the time being neither the stock markets nor many analysts are seeing the warning signals although they are being discussed almost every day. Maybe history will not repeat itself, but these three factors have never been good for the global economy and consumer spending in the long run. There is no question that we have new emerging markets where a great deal of purchasing power has been created, but we still believe that the same old rules apply.

For the time being, however, there is little concern to be seen. As a result, consumer confidence in the United States has risen to the highest level in the past four years and the consumer remains pretty unaffected by rising energy costs and interest rates. The manufacturing index also rose to a reasonably high level in the USA and polls in the EU-zone indicate a positive sentiment amongst businessmen and consumers.

US dollar declines

The most important development, in our view, over the past two weeks has been the sharp decline in value of the US$ versus most currencies of hide exporting countries. The really noticeable thing is not the fact that the dollar is declining, but how steep the fall has been in a pretty short period. This raises the question as to whether it’s going to settle or whether this expected, and desired, decline could be the beginning of a sell-off and lead to the collapse of the American currency. Let's hope it's not that latter, because this would create substantial problems for the global economy.

Market intelligence

The past two weeks were mainly y dominated by the pros which we stated in our last issue of the market intelligence.  Despite Asia, in particular China, taking its spring holidays, activity did not slow down completely and most reports and export sales statistics still showed a fairly high level of activity for raw material sales.

Consequently sellers were still in a position to sell all their available raw material and this is not a situation where raw material prices can come down. Quite the reverse was true in some isolated cases where hides and skins continued to increase in value. However, price increases were not only limited again but they were also only incremental, and this is the real surprise. In a market such as this, with sales being selective, stocks low and the outlook so good, sellers should have much more courage to push their asking prices up or at least remain far more stubborn in defending their price ideas.  However, price agreements are being found quickly and they are never substantially higher than the prices we have seen for a while. If one is looking for an exception it could be dairy cows which have made the most progress in 2006, gaining anywhere between five and 10%.

Having said that, everybody also has to remember that dairy cows were undervalued in comparison with their male counterparts and they are now just making up the difference.  But, they are definitely moving into dangerous territory, because when average quality cows from Europe or the United States reach levels close to or even above $55, it has always been the time to start to become cautious over the future of the market and prices.

Two possible directions

As we have said before, we only have two options for the second half of 2006. Either leather demand will remain as strong as it has been in the first six months and this will definitely lead to a new level for raw material prices, or we have just passed a classic period of excess pipeline replenishment and prices will settle, at the latest after the summer holidays. Our opinion is fairly clear, but everybody who has access to reliable information can make up his own mind and consequently make the appropriate decisions for his own business.

Until the summer break, however, it seems we will see much of the same. Whenever one market slows down for whatever reason another market jumps in to either fill any production gaps or take the chance to get offers that normally wouldn’t be around. In the past two weeks this was seen between Asia and Italy. The Italians still needed a number of loads to fill their production up to the summer holidays and they took the chance of the holidays in Asia to move around their supplier base grabbing everything that fitted their requirements for the months of May and June. The sharp decline of the US$ also handed them an opportunity, as many sellers realised that it might be a bit too optimistic to think they could obtain the price increases they need from overseas customers in one step. So, it was better for them to take the offers coming out of Europe and gain a bit more from existing leather contracts which had been calculated on a dollar exchange rate of around $1.20. This is the beauty of the raw material business that it is able to shift and react very quickly.

Asia reasonably quiet

Business in Asia was consequently reasonably quiet and, with the absence of China, many of the alternative markets in the Orient also took the opportunity to grab what was left for sale. This was not easy, because they also buy in US dollars and suppliers who do not buy in US dollars but in their local currencies probably needed a little bit longer to explain to their buyers that the issue at the moment is not calculating raw material price versus the existing leather contracts; it is instead making sure that the raw material still arrives in time to meet the shipping dates for the finished leather by the end of the season.

So, as good as it may look, we do not think that the past two weeks were anything more than filling production gaps and reaching the end of the season. We do not believe that tanners and present raw material price levels can operate profitably and so they are only buying what they need.

There was not much news in the skin section either. Some more interest was seen in double-face material and Turkish tanners in particular were trying to secure a certain quantity from the current new season lamb production. With the nappa season ending, business in nappa related skins was pretty disappointing and prices remained under pressure.

For the next two weeks we do not expect much will happen in the leather pipeline. In United States the seasonal slaughter will increase, while in Europe the seasonal slaughter will decline and one will most likely compensate for the other. Meanwhile, the southern hemisphere does not seem to have built up any substantial discrepancy between supply and demand. The interesting factor will be if there are still substantial production gaps to be filled in the tanning industry.  If this is the case those who have to cover them will be in trouble as suitable hides will simply not be available. If business slows down further, which we tend to believe will be the case, the market will settle, trading volumes will be lowered and price levels will steady. We renew our opinion that the new trend in the raw material market will continue until at least mid-summer.

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