Over the past two weeks, statistical data produced by the markets has been largely positive, confirming outlook predictions for 2007. Interest rates in the euro zone and Japan remained unchanged, and business confidence in Germany continued to rise significantly due to an inter-business poll.

Positive news was also released in the USA. Industrial production and output increased in January, as did capacity utilisation. On top of this, consumer confidence also did well. Last Friday the Michigan sentiment index was published showing a spectacular rise to 98 points in January; the best New Year start since 2003.

A lot of this widespread optimism is linked to the decline in oil prices during the second half of 2006 which actually accelerated at the beginning of this year. Barrel prices momentarily fell below the $50 mark before rising again slightly towards the end of the week. This represents a decline of approximately 30% since the peaks of last summer, lowering the cost of production for businesses and increasing disposable income for consumer spending. Currency and tax effects softened the impact of oil price rises, particularly in Asia and the USA, although less so in Europe. All these positive factors have helped to compensate for the slump in the US housing market.

The majority of analysts and banks are still stressing their positive outlooks for 2007. Stock markets were also sent higher as investors continue to expect a good performance for the coming year. Possibly less than in 2006, but the bull market is expected to enter into a fifth year. So all this has helped to support the positive consumer sentiment and, as we all know, psychology is a major factor in the development of economies.

At the same time, the increasing number of warnings also needs to be heeded. The main element of these negative arguments is the liquidity bubble in the global economy. There is not enough investment opportunity in the real economy anymore and in recent years money been redirected for high yields into hedge funds and private equity companies which has pushed equity prices to the high levels. With deals getting bigger and more money being poured into the system, there is a risk that the bubble will burst due to higher leverage and that this will reduce investment opportunities. This will eventually result in the growth of exaggerated equity valuations, hence their argument. We have to admit that we support the general logic behind this, but it is more or less a problem of timing. The same arguments could also have been applied last year and could have caused people to miss a decent return on equity investment in 2006.

However, more prudence about the increasing risks, not only in the financial markets but also in terms of global politics, and the strategic fight for raw material resources seems to be the most appropriate strategy in the coming years.

Market intelligence

As far as market activity is concerned, the last weeks have not delivered a great deal of news. Most people around the globe reported normal business along with a few ups and downs here and there. Prices remained fairly steady with some incremental advances, particularly in the United States.

The news we received from Europe was a bit mixed. Those operating on a daily basis in the main markets, such as Italy and Spain, were not overwhelmingly impressed by the situation or by the interest from the tanning industry. In fact quite the reverse, some people have even been raising concerns in private discussions, mainly related to the current financial situation of the tanners. A number of people close to the market scene have been confirming that payment attitudes are deteriorating by the day and that it is a big struggle to get payments without delays.

Most people are reluctant to speak openly about this problem or have their opinions quoted as they do not want to stir up any trouble. In addition to the payment issues, there are rumours circulating about corporations, mergers and takeovers within the tanning industry. Nothing has been confirmed and it is unclear whether this is anything more than just rumour, but it is fairly obvious that many businesses are looking for solutions for the future and some of the tanneries that are said to be having difficulties are looking for protection from those that are considered to be in stronger positions.

Even though there is nothing more than rumour at the moment, it seems to indicate that there is no smoke without fire. For those involved, we always have the situation that people have to be convinced that one plus one equals three and doesn't turn out to be just one and a half at the end.  In the case of the tanneries, and particularly those in Europe, it is unclear whether we are in a period of isolated individual management problems or whether it is more a kind of fundamental restructuring which cannot be resolved through takeovers and mergers. This will need to be discussed and decided upon by management committees and hopefully they will all be wise enough to take time analysing the situation adequately and to make appropriate final decisions.

Requests for shipping delays pick up

Remaining in Europe a little longer, most pundits are reporting a more fragmented development in the main tanning centres. More and more frequently it is the isolated few who are working at full capacity and doing well. Reports about a rapid slowdown in tannery activity are increasing and some raw material suppliers are even admitting that the product flow into their European customer base is starting to slow with a number of accounts. Requests for shipping delays, which have been extremely scarce of late, are now beginning to come in.

It should be understood that this definitely does not apply to the whole industry and there are still plenty that are running very well and are probably not even supplied in the volumes they would like. However, with the increasing reports mentioning problems and slowdowns, one has to see some writing on the wall.

The key question is whether this is indeed the start of a change that will, sooner or later, also affect those who are still doing very well, or whether this is simply the beginning of a restructuring process and a simple case of the survival of the fittest. It would appear that things are developing the way they normally do, with a mixture of the two options.

Footwear retailers gain confidence

As far as shoe leather tanneries are concerned, the hot topic for discussion is whether the warm winter will affect the business and cash flow situation. Looking at the show fashion in general and at the production in the western world, one rarely sees shoes that are exclusively designed as winter or summer shoes. The fashion of ladies boots remains the same regardless of the temperature and those being worn at the moment are not likely to perform well in traditionally wintry conditions. This may not apply to really cold regions but it is largely accurate for the vast majority in the northern half of the globe.

It is more interesting to consider how well shops selling this footwear are actually selling and whether they are stuck with a great deal of unsold material which are now discounted in the winter sales. Following the statistical performance of the retail business in the US and Europe it does not appear to have been too bad. Most retailers had a decent run and all brand names related to shoes and leather that had to publish their results have performed particularly well. So it must just be isolated cases that will be forced into an aggressive discount sale rather than the general situation in the trade. As stated in our last issue, it is more likely that, with a good selling season behind them, retailers have more courage to place orders for the coming seasons.

The only thing we can really sense is a serious attempt to find cheaper alternatives for the current productions. Calfskins and even normal bovine nappa leathers have become too expensive to suit the manufacturers and so they are still trying to find cheaper raw materials. They may be forced into this by new designs or alternative raw materials in order to maintain the production costs they consider appropriate for their calculations. Presently, there are few significant intentions to change the articles; they are busier trying to convince the market to react according to their needs and desires with the standard products rather than intensively trying to develop other options. And so trials and discussions are still pretty reluctantly executed.

Supplies sought from southern hemisphere

Upholstery and automotive tanners have fewer opportunities to switch to other raw materials. So their flexibility is limited to the choice of different raw material origins. Tanners outside the $ territories—mainly in Europe—not only have to find a balance in price, but also have to make decisions to protect themselves against currency fluctuations. While hedging is certainly one option, many find the use or part use of raw materials bought in $ a more sensible strategy. This has made supplies from the southern hemisphere increasingly popular again. Although they are still not considered ‘cheap’, or a solution to the calculation problem, at least the currency risk against export sales is cushioned.

The skin market seems to be attracting a little more interest. While the preferred raw material origins such as Australia, South Africa and Spain have already been enjoying high levels for some time, the less popular materials from the Middle East and Europe have been suffering for a long time and many were beginning to fear that there would never be any improvement. The situation is now starting to look better. Designers are showing more and more nappa leather items and this could actually spill over into the main consumer markets. The wool market is firming up with less wool available and the drought conditions in Australia are adding to the supply problem. Wool as a natural product is starting to re-enter carpet production, having already had a strong performance in the textile industry. This is helping the returns from fellmongering skins and helping to support the value of standard skins. This will be a great help for producers as the value of skins has been far too low for quite some time.

Struggle continues in splits market

The splits market is still not really showing any signs of improvement. Most finished products made from splits cannot find a place in standard leather fashion. If anything, they are preferred over wet blue splitting and the lime split continues to struggle. Gelatine and collagen producers in Europe are facing increasing competition from the imports of finished products and are suffering as a result of local regulations.

In conclusion, we can see that the hide market is no longer devoid of problems. However, with the fundamentally strong performance in the consumer markets, it will not affect the price situation in the market yet. The supply side is still comfortable and there is hardly any need for price reductions to stimulate demand. However, as explained above, isolated market segments—particularly expensive specialities—are facing resistance and may be ready for moderate corrections. Standard items for mainstream products are still well supported by general demand and the extended sales positions of the suppliers.

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