Market intelligence

The last two weeks were almost entirely in the hands of the geographical regions that are not taking their annual summer vacation in July and August.

After a market and price correction for US hides, Asian buyers remembered their favourite supply source once again and the big buyers were actively replenishing their stock and inventories. This led to impressive sales figures and one can assume that the immediate appetite of the strong players in the region has now been sated. We feel that the market assessment and position we took after the Hong Kong fair has been confirmed and that very little was wrong with general leather demand, it was only that the profitability of the tanning industry needed to be corrected, which it has been.

Not much has happened in Europe in the last two weeks. Tanners were either already, or in the process, of shutting their facilities down and most had already made their purchasing decisions and were not really in the mood to generate more activity. A few bargain hunters were still around to take advantage of some markets (for example the UK and Irish markets) as were some individual suppliers who were in need, or in the mood, to take discounts on the market. However, we don’t believe that this constituted any real volume.

The news from England of a new outbreak of FMD came as a shock. Although we do not think this is going to have any major impact on the hide market, as long as it does not spread to the continent, the market has always been quite sensitive to this kind of news and it is certainly a factor to consider in the short-term.

Overall there remains little to worry about or report on. Despite all of the concerns of the last quarter, the market activity seen in the last few weeks has brought quite a bit of relief and sellers can now take it a little easier for the rest of the summer. Buyers can too, as long as they have taken the opportunity to cover their raw material requirements for the next six to eight weeks.

Focus on lower priced material

However, we think it should be mentioned that the strong performance of the market was focused almost entirely on medium-to-lower priced material and we tend to believe that the clouds hanging over the higher end of the price range sector have not yet cleared completely. It seems that more expensive raw material such as calf and some of the central European hides which find homes in the upper-end of the product range have not yet had such a strong performance and, talking to their customer bases in the tanning and manufacturing base, things are by no means clear as yet.

While calfskin tanners are mainly complaining about their customers who, despite excellent profits and rising sales, are not willing to use and buy high quality, high priced leathers in the same volumes as in past seasons, tanners that mainly depend on good quality, heavy material from European slaughterhouses are still suffering from a lack profitability. Since the lime/split from such hides plays a far greater part of the calculation than from lighter and thinner hides, s the lousy condition of the split market also an important role in the total evaluation of the situation.

As a consequence the market in Europe is also a bit mixed. While those suppliers which have a strong foothold in Asia, where the product mix allows the sale of the majority of hides, are quite well positioned on the whole and more confident, others which mainly deal with the European customer base are much more concerned. The latter are hoping that the recent round of market activity will also support their market after the holidays. However, as the markets are still not really closely linked one cannot expect too much of a direct correlation in the development of the two.

Uncertainties in the high-end segment

For calfs and their substitutes the situation is even more uncertain at the moment. For the last two years nothing has stopped the constant rising demand for high quality nappa leathers for luxury leathergoods and shoes. With the present performance and results released by luxury leather brands and retailers it seems pretty unlikely that the demand for this exclusive raw material section should slow down. However, we have not only already commented on the mono-structure of the raw material used in this market segment which has been so heavily focused on such a limited raw material base which has sent prices skyrocketing, we also have to acknowledge the fact that only a very few of the fashion names are real ‘brands’ which need to defend a certain image and quality level even during periods of higher costs and raw material prices. In the meantime, many are trying to optimise their profits and are considering alternatives or cheaper raw materials. The problem is the seasonality of these sophisticated products as when certain article ranges are eliminated from a range they do not normally return before the next change of the season and this does not always happen immediately from one season to the next. We will probably have to wait well into September/October to get a real picture of where the calfskin market is going to settle. But, one would not be surprised if certain grades still have some more downward potential before finally settling and finding their bottom in the current cycle.

For the heavy and better quality hides much was linked to the poor performance of vegetable leathers in the second quarter. The majority of this raw material market is dominated by either automotive tanners and/or vegetable tanners in Europe. When the automotive tanners began to moan in the last quarter of 2006 after having pushed the market, vegetable tanners stepped in at the beginning of 2007 and kept the market segment strong for another three months. Since then both markets have slowed down and/or moved to cheaper alternatives. Upholstery tanners, being the third alternative, were by no means in a position to substitute the other two and pay the prices levels that had been reached. Consequently the market eroded and one wouldn’t be surprised if the correction is not yet fully completed here either.

Well, all this is rough guessing right in the middle of the summer, but the above was an means of describing how the whole market is not the same and that there are still a few aftershocks (see our previous issues) before the market can finally settle across all of the segments.

Our main concern remains the general condition of the global economy and the effects that rising food and energy prices are going to have on the normal family budgets. The wealthy, rich and mega-rich will not be touched, but this group does not account for the majority of global consumption.

However, this is probably more of a question for 2008 and needs further analysis later this year.

Splits still in the doldrums

The split market remains in the doldrums and the same trouble as before and we do not expect any improvement before the last quarter of the year when at least more gelatine and collagen demand should offer more stability in the lime split market. For splits for the leather production it is hard to find any good reason to expect to see a light at the end of the tunnel yet.

Skins also lack direction. Double face tanners—except at the very top end—are still uncertain about their decisions and the orders they are going to get for the next season. One thing is, however, pretty sure. The relocation of production to Russia, China, India and the Middle East is also in full swing and traditional tanning centres such as Poland, Turkey, Spain, etc. are all losing ground rapidly. The weak USD and manufacturing costs are the main driving factors behind this.

For the next two weeks we will be in the peak holidays season in Europe so most eyes will be focused on trading in Asia or, better put, on trading between Asia and the Americas. Most of the interest will be concentrated on the next export sales figures from the USA and market news from South America. A few more weeks of above average sales numbers and we will be able to assume that we are over the problem and that people will plan then their trips to Asia and the Shanghai fair in a pretty relaxed mood. A great deal is pointing towards the fact that big deals are being concluded privately again and that the real players have done their homework. Again it is pretty satisfying that the market is now gradually firming as this is protecting sellers’ positions and tanners’ price negotiations for leather. As far as prices are concerned we might see offer lists with some higher levels to tease both the market and buyers who haven’t secured enough as yet, but we consider the chances of higher prices with quality buyers as being pretty limited in the coming weeks.