Towards the end of the year, little if any enthusiasm can be seen in relation to the macroeconomics. Most analysts’ projections for 2007 are a reduced forecast compared with 2006 forecasts, but statistically the global economy seems to be continuing on a positive track, despite a general slow down.

Besides growth, inflation also seems to be under control, mainly due to the fact that some of the inflated commodities are looking softer and could become cheaper than the current year’s average. This is predominantly important for energy, and oil prices are more likely to fall to $50 than to climb back to the records of this year. However, we should never forget how much this is also related to political stability and exogenous factors.

Consequently, the outlook for interest rates also remains positive and, in view of the above, most expect the final round of interest rises in Europe to come in December with a potential for declines in the USA for early 2007.

The budget and trade deficit in the USA and the unresolved situation in the Middle East continue to cause concern. At the same time, the shift of wealth and the job situation could eventually become a problem for the old economies although at present the US job market is still generating good news, jobs are being created and the unemployment rate has been reduced to 4.4%.

The currency market has also been quiet, with continuing trends of a very slight strengthening of the Chinese RNB and a weakening trading range for the $ versus the €. The size of the spread has declined and it is now just manoeuvring between 1.2770 – 1.2870. This is normally a sign of a potential sharper move in the near future, which is more likely to be towards 1.30 than on the upside.

Market intelligence

Slowly but surely we are reaching the end of the calendar year. Although the Orient does not celebrate Christmas in the same way as the western world, it has also become pretty common for activities in Asia to slow down for a moment at the end of the year. Having reviewed the situation with European producers, it is becoming apparent that many of them are taking a fairly long break. This is not related to a lack of orders, but many factories are using this period to use up a certain proportion of the holidays allocated to workers for the year. In combination with a long summer break, the majority of the holidays are used up in this way, thus allowing consistent factory production throughout the rest of the year.

In the last two weeks we have seen another good example of how empty the leather pipeline is. The US hide market saw another round of activity but this resulted in another increase in raw material prices. Sellers took the opportunity to increase their revenues and buyers had little option but to pay if they wanted the raw material.

Leather remains integral to ladies fashion items

In Europe the situation looked a bit different and, with the seasonal kill finally starting to increase, the market in the old world did not appear to be in the same favourable state. The weaker $ has also got its effects and with the shutdown of a lot of factories for a substantial length of time around the end of the year the number of fresh, chilled programmes will be interrupted and this will force producers to salt the hides and either to keep them for their customers or to try to place them elsewhere. European suppliers are already benefiting in a small majority of their productions from the firmness in the US market, as all the strength we are seeing continues to be derived from the side leather business.      

Wandering around shopping areas across the globe, one can easily see why we have seen such a tremendous performance in leather production over the past year. Shops are filled up with ladies boots and bags and the current fashions are still dictating that the use of a fair amount of leather is essential for the fashion-conscious women – except in garments of course.

As far as fashion designers are concerned, this is going to continue for the coming seasons. We will have to wait and see whether women will accept another season of pretty much the same or if they will get tired of continually shopping for items they already have. If the fashion finally moves away from long boots for the next winter season it would free up a lot of leather for the market and would reduce the demand for raw material. Or perhaps they will use other raw materials in the design section, such as cheap and abundantly available sheepskins. We will find out eventually.

Move towards cheaper alternatives

In the meantime we have to live with the present situation. This means that the average raw material is still desperately in demand and tanners are forced to continue buying in order to cover production and their existing order books. In previous issues of our report we have dealt with the fact that a certain level of sentiment was realised at Lineapelle in Bologna, which could be working against the high price calf skins. The very high price level has encouraged a large number of producers to experiment with alternative products and this has been backed up by a number of their clients asking for cheaper leathers. It is too early to say whether this has already had some success or whether it is just a temporary issue, but the frenzy for calf skins has definitely slowed down. In some parts of Eastern Europe, inflated origins are now starting to feel some resistance and in Western Europe sellers are also finding it more difficult to convince their regular buyers to take the previous volumes of the privileged grades.

In some other segments which have exhibited a particularly positive performance in the recent past, producers are experimenting with more economical raw materials to get out of the squeeze from their regular suppliers.  The French market is already feeling some of the headwinds and is one of the few that has lost a few per cent compared with its peak seen a little while ago.

Shipments to Asia face slowdown

The rising slaughter all over Europe, that has now finally arrived after a very warm autumn, is giving some relief to the market situation. The massive supply shortage we saw after the summer holidays in September is slowly but surely disappearing and the market is working towards some kind of balance in this part of the world. Remaining for a moment in Europe, the Christmas break will add further hides to the availabilities and distressed market conditions should at least temporarily be over.

Since Asian producers will be taking their break starting from mid-February, the shipments to this part of the world should also slow down in the first two to three weeks of January to avoid arrivals during the holiday period. If it all fits together well, the European break could be immediately followed by the shipping break to Oriental destinations. This is nothing to particularly worry about yet, but it would certainly help to relieve a bit of the pressure from the raw material market. Sellers at least still consider the risk potential for prices to be pretty low due to the very comfortable sold forward position.

Struggle in splits and skins market

The splits market has not changed very much. Many continue to complain about insufficient sales and there are still complaints about prices. Without any particular change in fashion it seems that there is not too much hope that this will change in the very near future. The only ones doing significantly better are those who can supply splits to the gelatine or collagen industry. Both productions are still enjoying a much better market situation than the leather side.

The skin market is also just running its course. Good and top-quality skins are still finding enough interested buyers while the others are struggling. The season for lambskins and in Turkey has also significantly slowed down and this is reflected in a moderate drop in prices for skins throughout Northern and Western Europe. Prices have consequently fallen by about five to ten per cent. We have been receiving some more positive reports of interest for low-grade material from the Middle East and sheepskins also seem to be attracting more interest; there have been many reports of a good deal of sampling. The Chinese are still pretending to have enough domestic material available for their medium and lower grade needs.

Little change predicted

For the coming weeks we suppose that more of a slowdown can be expected. Maybe we will even reach some kind of crunch point. Here and there we were still seeing some end-of-year activity, but in general sellers are already sold and it seems that in the meantime buyers have also done their homework and have productions covered over the holiday period. Many in the western world are also finishing their financial year December 31 and have begun the necessary preparations for closing their books. With the recent strong performance from the Asian buyers it would not come as a surprise if they were to take a break for the time being. They are definitely the only ones who still have the capacity to remain active for some weeks. It is pretty unlikely that the market will move a great deal in the near future. With the present situation for sellers it could really only be on the upside and it is hard to believe that tanners will be willing to pay another immediate price rise in the short term.

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