Macroeconomics

The hot weather has set in and the summer period continues to have an affect on the general global economy. The most significant event at the moment is the ongoing political turmoil in the Middle East. The daily news has shifted its attention from the casualties in Iraq to the fighting in Lebanon when Israel was attacked. Many of the victims are, as always, innocent civilians who find themselves caught up in the political or religious conflicts of their leaders. While the conflict is not currently impacting the global economy too heavily, the long-term effects of these tensions are a cause for concern.

In terms of the world economy, only a few statistical data of particular interest were released. The US economy seems be slowing down slightly with GDP rising by just 2.5% in the second quarter. This is significantly lower than in previous quarters, and is raising hopes that there will be no further interest rate hikes in the United States. This could eventually rest on the value of the US dollar which has still been trading in a very narrow trading range against the euro, between 1.25 and 1.29, during the summer. Most experts are still predicting a significant drop in the value of the US$ and, if this speculation is an attempt to push it lower, the period after the summer holidays will probably not be too bad. However, in recent years we have seen that the US currency normally establishes new levels versus other major world currencies between the beginning of November and the end of December. So it could well be that this year we will see a similar trading pattern and that there will not too much variation in the next eight to ten weeks, but that more movement will occur when market players need to reposition themselves for 2007.

Apart from this, we saw that the Chinese economy is still expanding rapidly at a rate of more than 11%. South Korea also performed well with an expansion of 5.3% and many national banks around the globe lifted interest rates without too much ceremony.

 

Prospect of inflation causes concern

We still see many people in the financial markets using the term ‘inflation’ with great care because we are entering a kind of a cul-de-sac where, if things really go wrong, the result would be further raw material price increases, which could be combined with increased consumer prices, higher interest rates and more expensive labour, all of which would come at exactly the wrong time if the global economy is in fact slowing down. It will not help to be too pessimistic; rather let’s hope that Murphy’s Law will not apply and that the economic trend continues to remain on a positive and steady track.

 

Market intelligence

The market has really fallen into a period of summer strife this year. Since the beginning of July, market activity has been falling constantly and most members of the trade are still debating whether this is the main reason for limited supply or lessening demand It seems that market players from either side of the Atlantic are taking a very different stance in this debate.

 

Discrepancy between Europe and US reports

In Europe, one still finds very few people who are actually complaining about the situation as far as sales are concerned. Quite the reverse in fact; the incredible heat wave this summer has reduced the cattle kill for various reasons. The demand for beef, in contrast with the United States, declines when the weather is hot as people tend to use pork and poultry for barbecuing rather than beef. Farmers are often busy with other operations on the farm rather than selling cattle.

Some people are now arguing that the recent drought will reduce the supply of grain and feed and that, as a consequence, a larger number of cattle will come to market later this year. We don't particularly follow this opinion; we think that cattle herds in many parts of Europe were already shrinking last year and that the fairly good kill in the first quarter of this year may also have reduced the availability of live animals. This can also be seen in prices for live cattle and calves which have risen significantly over the past month. Farmers looking for a reasonable deal for their cattle may have a promising time ahead of them when the summer ends and local beef consumption starts to pick up again.

Over the other side of the Atlantic, in the United States, many different opinions are being voiced. While it seems that big packers are still in a position to move most of the production they want to move, it appears there are some regions and hide qualities which are not doing too well. Export sales are also declining after the strong performance of this market in the first four to five months of the year. It is too early to decide whether pressure on prices is already building, as many other markets are still recording a decent amount of interest for raw material.

Most European suppliers are still reporting decent and constant demand for hides out of Asia, particularly from China. Many suppliers claim they are still not actually disposing of the product in the volume the market would like to buy for shipments in August and September. It is interesting in this kind of situation that sellers are not taking the opportunity to increase asking prices, but are actually refraining from putting any offers out. At the same time, buyers are not really willing to tempt sellers by indicating they would be in a position to pay a fraction more in order to secure the supply.

 

Asian buyers turn attention to Australia

It still remains an anomaly how such different positions between two of the main supplying markets can be explained and, quite frankly, even we fail to have a clear opinion. Even less so when one considers that Asian buyers would normally prefer to buy from the US and only direct their interest to Europe when supply or prices from across the Atlantic are not considered suitable.

Talking to some of the larger Asian buyers, in particular in the upholstery sector, they are claiming that they have shifted their purchasing interests and needs for August/September shipments more and more toward Australia. This may be the case as far as Australian hides can provide a one-to-one substitute for European or American hides.

Whatever the final truth is, one thing can be said for certain. Due to the almost complete transparency of the markets, quick information and very tight links between the key players on the supply and demand side, interest for raw material is shifting quickly when either the volumes or the prices do not suit buyers.

 

Slowdown in global economy expected

Having so little to think about regarding the current trading situation in the global market, thoughts are increasingly moving into the future and what this is going to mean for the market after the summer break.

On the supply side, we are going to see a reverse trend, which means a decline in the kill in the US and an increase all over Europe. Including the southern hemisphere, the balance of supply still seems to be intact and, with the continuing positive trend of the global economy, beef consumption should not drop significantly.

However, in talking about the global economy, one can clearly see that the indications for some kind of slowdown are there. Most national banks continue to increase interest rates although those responsible are trying to play this down, trying not to discourage business by introducing quick and rapid increases or by indicating that interest rates are going to move sharply higher. By contrast, the US Fed is already suggesting that the period of rising interest rates could come to an end with the US economy showing some signs of the slowdown.

 

Little change for leather business

For the leather pipeline and leather business we will have to repeat ourselves. At this stage there are very few signs that interest for leather products will sharply decline. With the constant interest for raw material over the summer from most manufacturing markets, one can assume that the large retailers have placed sufficient orders for the second half to keep most of the businesses running. Whether the unstable situation in the Middle East will eventually have an affect on global consumption of consumer products remains to be seen. Most of our readers know that we have been always very cautious about political instability and regional crises, but it seems that the global consumer does not really pay much attention to this anymore.

 

Leather and raw material demand becoming more specialised

With the Chinese economy still expanding at double digit rates, and countries such as Russia and other oil producing regions still collecting a tremendous amount of wealth, it seems that these dynamics, plus the good performance of other emerging markets, are strong enough for basic consumer goods to keep leather producers and leather product manufacturers pretty busy. Only a significant global economic crisis could put an end to this positive trend.

The other side of the coin is then, obviously, that the supply of adequate raw material will not be enough even if every drum ran at full speed in the near future. However strong the demand may be, one thing can already be clearly determined. The demand for quality of finished leather and consequently for raw material is becoming more and more specialised.

We have been dealing with this problem for a year or two, since we started complaining about the inflexibility tanners are left with these days as far as their raw material supply is concerned. It may already be improving, as we have seen above, and at least buyers are not completely stuck to one particular origin of raw material anymore. They are in a position where they are able to substitute similar raw material types from various continents around the globe. However, this is still not enough and tanners should be given more freedom as far as raw material origins and the technical and quality aspects of the products are concerned.

 

Garment leather to become topic of interest

Other markets, such as splits and the skin market, have been in as much of a slump as bovine hides. One hears very little activity around the globe and it seems that it will be another two or three weeks before activity can be determined again. From our point of view, we are particularly interested to see if fashion shows after the summer will display more leather in garments again. It remains a mystery that very cheap available garment leather is not yet attracting much interest, either from designers or from retailers. Leather remains a very attractive material and is still appreciated by the customer if it is well made and presented. The price, which has so often been the argument for not using leather, is definitely not an obstacle today. The top luxury end is still using a lot of high quality raw material and leather is definitely an image product for accessories in general. This normally spills over into the mind of the ordinary consumer and the interest in something made from leather should also increase again. Considering that the leathergoods business in Asia has been very good for almost three years, it is still difficult to understand why it continues to almost completely focus on leather made from bovine hides. There is very little reason why a lady’s bag or other leathergoods should not be made from sheep, lamb, goats or crossbreds.

 

Little change foreseen for next fortnight

For the coming two weeks we still do not believe that there will be too much change. Asian buyers will continue to monitor markets for buying opportunities. The majority of European buyers are on holiday, and only some tanners in the north of the continent are slowly starting to resume production.  As such, this will have very little impact on the market.

In the second half of August, a bit more activity should be seen again and many people involved in the trade will be preparing for trips to Asia for the Shanghai Leather Fair in the first week of September. It will be very interesting to see how much material they will carry on trying to sell to their customers for the third quarter, or perhaps even longer. When the general situation is as unclear as it is at the moment, a trade fair is always a good opportunity to get a better impression of the market situation. As far as prices are concerned, we would be very surprised if much change were to occur in the near future. Changes that have not occurred in the last two to four weeks are not likely to occur in the next two. Those who are not operating in the US dollar area may still be well advised to keep an eye on the currency market, because the financial markets have also been suffering over the summer and could present some surprises when people return to their desks after the holidays.