Taking a moment to relax and think about the situation, one cannot deny that tensions in the markets are constantly growing. The gap between sentiment and the economic realities in the leather business continues to widen and where conditions are overstretched, they will need to return to a normal balance. Insufficient or non-existent margins in the manufacturing pipeline have not improved or been resolved for quite some time. Hopes for a raw material price adjustment to sort this out have been unfulfilled so far and the vast majority of hide prices around the globe facing strong demand and forward positions remain well protected against major corrections in the near future. However, with the massive profitability problems, the demand for raw material continues to shift into the lower and more economical end.

Prices and demand for economical hides continue to rise while the medium and higher end of the product range still profit from the sales and conditions during 2006 rather than from a strong performance in 2007 so far. With leather prices still maintaining massive resistance against price increases, higher production and raw material costs continue to eat aggressively into cash-flow for many. With order books for leather still basically well filled, this is not a situation that can be easily managed. So far, 2007 has been quite uninspiring and directionless for European hides and resistance against further price increases is immense. So far, the supply side has prevented a correction in the market. Side leather business is still strong, while we are convinced, that upholstery is facing more trouble than most people tend to believe.

The kill: The kill is also totally uninspiring. 2006 ended with a 1.5% increase compared with 2005. However, the second half saw a sharp decline after an approximately 8% increase in the first half. With increasing milk production per head and few changes in the herd, the kill will be low in most parts of the country next week due to the carnival season. 

What do we expect: In public, little will change next week. We still sense huge problems (profits and cash) in the leather industry – in Europe at least. The $ has fallen and resistance is growing while butchers are still not admitting the need for price adjustments. So, the race in the thick fog continues in the hope that not too many obstacles will be crashed into on the way.

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