There is currently a high level of uncertainty in the financial markets and in the global business environment. The political tensions between Iran and the rest of the world following the kidnap of fifteen British soldiers is yet another example of how little the integrity of human individuals is respected these days in times of conflict.

The situation in the Middle East is sending oil prices on another rollercoaster ride and breaking news is causing prices to rise and fall rapidly. Since we cannot expect the fundamental problem to be resolved in the near future, we have to accept that energy prices are likely to remain high for some time and this will undoubtedly have an effect on both global inflation and consumer spending.

Looking at the financial data and the news, one couldn’t be more surprised by what we are hearing. US consumer spending was up by 0.6%, as was personal income. However, although people were spending more, they were also less optimistic. The University of Michigan's index of consumer sentiment fell to 88.4 in March from 91.3 in February. Home interior companies and furniture sellers are worried about their business outlook due to the slowdown in the housing market. As a result, the conflict between those who feel the economy is still on track and those who expect an imminent decline continues.

Federal reserve chairman, Mr Bernankes’ statements have not really cleared this up. On one hand he gives the impression that the economy is still on a healthy track and that problems within the housing markets are not spilling over into the general economy. However, he is also expressing concerns about inflation. He implies that the Fed would be willing to cut interest rates if it was necessary in order to spur the economy, but also suggests that they need to fight inflation, which would require the opposite action.

Our regular readers will know that we have always been worried about the return of inflation and we are now more concerned than ever before. The effect of globalisation—which has kept consumer prices under control for many years—is coming to an end as most cost saving potential has been exhausted. Raw material prices have been shooting up, transportation is becoming more expensive and we also believe that the rise in food prices was not just a blip, but is becoming a long-term trend. If this is true, interest rates should increase in the medium term and the liquidity bubble, which is still supporting the equity markets, could eventually burst. For the time being, the massive growth in the emerging markets is covering up most of the problems, but even this cannot last forever.

As a reflection of the above, the currency markets have also been like a yo-yo and the exchange rate, particularly for the $/€, were sent up and down within minutes. Oil prices are now well established at levels of over $60 a barrel and remain extremely sensitive to the situation in the Persian Gulf. For the moment, anything could happen and it would take very little to push them to new records.

Market intelligence

APLF came to an end on Friday and over the last two weeks the global leather community has been wholly focused on the Orient, which is the centre of the industry today. However, if people had been expecting big news or any fundamental changes in either the situation or the outlook, they will find themselves disappointed. If trips to the Orient were merely undertaken for information purposes it would have been better to save the money as we were unable to uncover anything we didn’t already know.

So, to give a short summary of impressions gathered in Asia:

• Leather demand remains solid and there are very few people expecting a decline in leather orders or production for 2007. Quite the reverse, in fact, as most have increased their expectations. This particularly applies for shoe and leather goods production.

• Leather prices are rising. Tanners were able—and had all the arguments on their side—to increase leather prices by 5%-15% depending on the article and the starting level. Some have taken one large step while others say they had already moved their price levels step-by-step in 2007 and intend to continue this policy in the coming months.

• The leather pipeline is starting to look for solutions to the obvious shortage of adequately priced raw materials. For women’s shoes, ovine skins are being considered, while a number of people are also reporting an increased focus on synthetics once again.

• Splits remain on the sidelines as suede is not an issue in fashion at the moment. However, it would come as a surprise if this did not change as the year progresses.

• Pollution control in China is finally becoming a serious issue and it is not only shoe tanners who are now eyeing production alternatives; upholstery tanners are also starting to consider alternative beamhouse locations in order to avoid harmful political decisions. Vietnam remains one of the most desirable locations, but it appears that the government there is also unwilling to grant many more beamhouse licences.

• Despite the rise in leather prices, profitability remains under severe pressure and export prices are causing the biggest headaches. Many tanners in China are reporting much better revenues in the domestic market at the moment. Higher demand and the rising value of the RNB has helped to increase margins in the domestic markets, while export prices can only be justified by the need to use the production capacity. 

As many people mentioned during the show in Hong Kong, it is hard to remember a time in the trade when things looked as positive as they do today in terms of business potential and sales opportunities. The most problematical issue of business life—working for a corporate profit—has been secretly denied.

The situation prompts us to challenge whether there is anything that could prove the feel-good factor to be wrong. We have discussed this with many representatives from the retail sector through to the production sector and, at least for the short term (a timeframe of around three months), we would need to make up stories in order to find a dark cloud in the sky. However, it is important that the following are monitored closely:

• The $. If the rate continues to stay well above 1.32 against the €, European tanners will continue to suffer. Imports of leather and falling competiveness on the export markets will continue to threaten their business.

• Change of fashion. If the ladies’ boot fashion comes to an end it will eventually reduce leather demand significantly. The same applies to the handbag fashion.

• Changes in materials. If synthetics are really gaining ground and designers reduce leather use, this could slow the demand for leather. The return of splits into the collections could also affect the balance of the leather market.

• Economic development. While Europe is having a good run at the moment, a severe slowdown in the US would harm the global economy and, despite the strong performance of the domestic retail markets in the emerging markets, recent studies show that exports to the US still constitute up to 65% of Asian exports. Furthermore, the recent situation in Japan has raised concerns about deflation again. In other Asian countries, such as Korea and Thailand, consumer spending has pretty much been based on consumer credits which could be interrupted if banks decide to cut the cash flow or if consumers start to default on their loans.

• Political situation. The tensions in the Middle East do not seem to be dying down very quickly. Quite the reverse in fact seeing as no solution to the Iraq or Iran problem is in sight. Although the global community is ignoring the situation as far as daily life is concerned, it would not take much for it to move back into the foreground.

• Inflation. Statistical data is still presenting a reasonable level; however, speaking to ordinary people all over the world, we get a different feeling and hear that prices are already rising or that family budgets are being significantly cut by energy costs, taxes, food prices and public fees. All of these are basic expenses and can only be compensated by a rise in wages or a reduction in spending. This is particularly relevant to those countries where the saving rate is already negative (USA).

Again, this is not a priority list, but simply a list of factors that could have a negative effect on the situation later in the year or into 2008. All things considered, it doesn’t appear to be very positive and it will require another tremendous performance in terms of consumer spending from the emerging markets in order to compensate short-term effects.

Buyers and sellers remain positive

As far as business activity was concerned during the APLF fair, the general consensus was that not a huge amount of raw material activity was seen. European and Australian suppliers did not have a great deal to offer and American suppliers were unable to find a sufficient number of customers who were willing to accept their present asking levels. In the end, this was no major cause for concern as buyers are quite convinced that suppliers will eventually compromise on their asking levels. Sellers are equally convinced that, with the present leather demand, buyers will finally be forced to give in and will accept the offers during the next few weeks.

The splits market continued to be problematical for those selling average quality splits. Most of the tanners from Europe and the United States reportedly had to take reductions on price and then they were not in the position to dispose of the production.

Larger Easter-time slaughter causes concerns

The situation on skins was rather mixed. High price double face origins are still struggling and Spanish skins in particular remain under severe pressure.  However, lower price skins did much better and sheepskin with wool on attracted the attention of Chinese buyers. We were given the impression that crossbred types are finding more interest, and interest for nappa garment leather seems to be increasing although price levels are still pretty low. Even with the present situation, a number of suppliers are still concerned as they see the larger kill over Easter approaching and are not 100% sure that the market will be able to swallow the additional quantity easily.

The next weeks are likely to be fairly quiet. Many will simply be returning home and will use this week to digest and work on the results of their trips to Asia. The Easter holiday will also create a break and many will then start preparing for Lineapelle in Bologna. Only if Asian tanners still have a large open-to-buy and find it appropriate to accept the asking levels of their suppliers would there be any significant market activity in the coming weeks. Otherwise it looks as though things will be relatively quiet until after Bologna. A new direction and increased trading activity can only be expected towards the end of the month. Consequently, prices will remain in the extremely narrow trading range that we are seeing at present.

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