Environmental issues could harm Chinese leather industy
Macroeconomics
The most interesting and important issues in terms of the general macroeconomic situation are probably those that have not been covered by the media. Officials are still reluctant to admit how significantly inflation is affecting food and energy prices and are still playing around with other definitions and inflation calculations.
However, inflation should not be an academic issue. It should actually measure the real CPI (Consumer Price Index) or, more accurately, the ‘cost of living’ of ordinary consumers across the globe. All other data can be left to the ‘scientists and experts’ to play about with.
According to The Economist index, food prices have risen by 23.7% in the last year and, with the recent rise in oil prices, energy costs are also constantly increasing. This is in addition to fees and taxes, which are presently still being covered by rising income and asset prices in many parts of the world, which cause people to feel wealthier and more comfortable so long as there is no decline in these areas. It is a risky game.
Meanwhile, those responsible for playing down the risk of inflation are the major banks, particularly those in the In the meantime, oil prices per barrel have risen to $78 and further increases could take place over the summer. The $ is falling further, reaching a new record low of 1.38 against the €, and it seems that the markets wanted to see the 1.40 mark cracked before investors understood how this will affect the export boom in The situation in
Market intelligence
The reports will be getting shorter in the coming weeks. We are entering the holiday period and most people in the western world or, more accurately the northern hemisphere, are taking annual holidays and many businesses are closed for vacation. Even though the largest production region in the world, It also seems that the market is in need of a break and most players will need this pause to sort out their ideas and to plan carefully for the rest of the year. This is understandable as the last quarter was quite animated and brought quite a bit of additional excitement into the leather pipeline, which was not dull by any stretch of the imagination.
The price correction phase, which had hit a few markets around the globe, has made a number of players pretty nervous and, while sellers were afraid it could become much more than a correction, buyers were hoping for further declines in order to sort out their profitability problems which had been hitting them extremely hard as a result of rising chemical, energy, labour, effluent and, last but not least, raw material costs. While raw hides still comprise the largest share by far and are the one sector with any hope of a reduction at the moment, tanners and leather manufacturers have been anxiously monitoring the raw material market.
In the end, we probably finished the second quarter in the most positive way for all parties. Prices in overvalued markets fell sharply, while others fell moderately. Declines have reached levels of between 5% and 20% so far, which would be considered significant if the top levels reached in April could be considered realistic trading levels, which we don’t seeing as how the volume and quality of trade at such high levels cannot be considered representative. However, even a reduction of 10% is fairly high and reflects the trend. But, as usual, we are not overly concerned about exact figures, but more about the trends.
The leather pipeline cannot complain as they close their books for the summer break. It was only a few months ago that many large producers of bovine raw material were trying to convince the world that there was a never-ending shortage of raw material and an irreversible upward trend in prices. As convincing as some may have sounded, and as confidently as the arguments were presented, raw material and leather prices cannot be compared with other commodities when the percentage of raw material costs, or the consumer demand for a finished product, is completely different.
Reports of demand outweighing production
However, since the fundamental arguments were more or less correct (preliminary: rising global wealth and consumption are outstripping the offer of adequate volumes of disposable raw material), we have always been convinced of a strong need for a general market correction in order to balance the vast discrepancies between the real cost of various raw materials. Despite this, there is no realistic chance of a real bear market (yet).
This is where we stand today. In our market judgement, the correction phase is in its final round and only limited and final movements can still be expected. Why do we believe this? As far as our market research goes, we understand from those representing the market that there have been no problems selling the volumes they needed to and that the balance between supply and demand or, more accurately, stocks, sales and shipments, has largely been re-established. Some even went as far as to say they had more enquiries for specific grades than they had product to offer.
This may refer mainly to the standard grades and the fringe market, while for the higher priced and higher quality grades the situation may be slightly different, but for the key raw materials the statement stands. There may also be some isolated suppliers who missed the boat or were dealing with the wrong clientele or the wrong conditions, but, in our view, this does not change the fundamental market settlement.
Best to let the dust settle
We can only urge those that are already speculating about a rebound and a sharp turn to be cautious. In addition to the fact that we do not expect the market to react on higher prices across the board, we would simply enter into the same fundamental problem we saw in the first quarter – and the consequences we have seen in the last few weeks. However, it is pretty obvious that some of the group that missed the market, or had not selected their customer base well, would love nothing more than a sharp rebound in prices, which would support their positions in discussions about claims and contracts that have not been honoured with buyers. They probably will not like to hear this, but it is typical in terms of trade to see groups pushing the market over a cliff and, if this is the case, they cannot complain about the consequences. Everybody would be well advised to leave things as they are at the moment and to hope for the same kind of stability we saw for the majority of 2006, at least for the rest of the year. Even moderately rising prices would not be a disaster as this is normally a fair guarantee of stability and keeps the general market and price trends less volatile.
Cash situation could cause problems
So, is there anything we could see as a posing a threat, or to suggest that the present situation is only pause and that prices will fall further after taking a brief break in their decent? Well, judging by the fundamentals we would say no, but we have to admit that, in all optimism, we are watching two things with great care at the moment which could have a negative impact, even in the near future. The first is the cash situation in the leather industry. In many cases, cash is pretty tight and the summer break in
Chinese pollution strategy could force closures
The second is the situation in
a) the clear position the government is taking against polluting industries that are not considered to be core activities
b) the tightening of credit facilities
Environmental issues are quickly becoming an extremely important topic on As far as credit facilities and cash flow positions are concerned, it is well known that a lot of companies in China are burdened with debt and that any rise in interest rates makes it more difficult for them to continue. The worst of this is that many companies have borrowed more than they actually needed for their businesses and invested the excess or even more into other assets such as stocks and property. This is fine as long as investments increase in value, but would be a disaster if the stock or property market reverses. There are echoes here of the Asian crisis 1997 where similar activities were pretty common in countries such as Even though we do not expect the same level of risk, it is obvious that banks are monitoring their clients in the leather industry much more intensively and this could affect some of the bigger names.
Turbulence of this kind would certainly have a negative impact on the market in general, but a major reversed trend is only to be expected when the global economy is eventually slowing down and consumer spending across the globe is about to diminish. However, those travelling in Asia and South America, or visiting the large shopping malls around the globe, are seeing very little decline in shopping as yet and give the impression that retailers should be focusing on replenishing stocks rather than cutting orders or budgets.
The skin market is not offering a huge amount of news either. The first Turkish tanners are looking around for double face material but have become more prudent these days and are only buying when they have sold the leather or have clear indications that it will sell. The falling $ is not good for purchases in We believe the market will calm down further in the coming weeks. We expect some activity from
The splits market has not been good for a long time and is not looking any better now. Revenues from splits are still not helping leather calculations and we will need more time to gauge whether fashion and pressure on prices give splits a helping hand toward leather production.
