Import tax will hit overseas hide-dependent tanneries hard
09/10/2007
Raw materials
Generally speaking, there is a lot of bad news for Chinese tanneries at the moment. The price of raw materials is rocketing, and the government is forcefully implementing environmental protection regulations, and a new tax policy for imported hides, all of which is making life much harder for small-to-medium companies. With ever stricter policies on effluent treatment, more and more small operators are shutting down.
It is well known that China has traditionally had abundant raw hide resources. However, the country’s own resource can no longer meet increasing demand. Raw hide is always a big problem for tanneries. To ensure raw materials supply, big tanneries try to maintain not only stable relationships with slaughterhouses, but, in China, also go to villages sometimes to collect raw hides on site. To cover their regular demand, they also import a large quantity of hides.
Small-to-medium tanneries are not lucky enough to be able to access medium-to-good quality domestic hides. What they have to do is to buy imported, low-priced hides mainly from Africa, the US, Mongolia and so on. At present, the price for imported raw hides has increased by about $20 a piece on average, compared to 2005. The demand for cheap cattle hides exceeds supply.
How to keep a continuous raw materials supply has become the most important matter for tanneries. Big operators have their special channels, as described above, but smaller ones are also finding ways of working around the problems. For example, we have heard of some small operators joining together to collect and purchase raw yak hide in Mongolia. In this way, these partner companies not only shared the risks, but also improved their bidding power. With the footwear market still moving strongly upwards, these tanneries are able to keep margins healthy.
Things are not so good for all small tanneries though. Those who work with pigskin are going through a difficult time. Wenzhou, the best known footwear production centre in China, is also famous for its tanning industry. And besides several large-scale tanneries dealing with cattle hide there, Wenzhou also has a large number of small tanneries that work with pigskin.
A rise in meat prices is the main reason for an important increase in the cost of pigskin. In the first half of this year, the price of pork shot up reaching, at its peak, double the price at the same time last year.
This situation has forced the government to take urgent steps to keep the price of pork steady. But with pork reaching such a high price, abattoirs have been refusing to sell pigskin as before. Their view is that selling the skin to meat-processing factories instead will earn them higher profits.
By August, the price for Sichuan pigskin (the best quality in China) had already reached $12.4, while the price of imported pigskin from US and Canada reached about $10 per piece, instead of the usual $6. The government’s efforts to stabilise the pork price seem to be bringing everything back to normal now. Now the domestic pigskin price is stable at $9.3 per piece. We estimate that it will go even lower owing to very limited demand.
Another reason why the raw materials price in general is rocketing is that there is less and less domestic raw hide and skin resource. The quantity of cattle hide and goat skin is much less than several years ago. No one knows the exact extent of the reduction, but everyone agrees on this point.
In China, cattle and goats are normally fed by peasant families in rural areas. For complicated reasons, country people have lost confidence in raising animals in this way.
First of all, they have to face on their own the risks that come from market fluctuations and infectious diseases. Secondly, for most young and middle-aged people, it is easier to make money in the cities than in their home villages. Thirdly, the price of foodstuffs, especially corn, has increased, leaving very little profit left for farmers.
New policy influence
A new tax policy with regard to exports is having great influence on China’s leather pipeline. In China, the leather and leathergoods sector is traditionally export-oriented.
According to statistics, for over a third of enterprises in the leather pipeline, exports earnings contribute between 20% and 50% of turnover. For 8.3% of companies, export earnings are the source of between 50% and 80% of total turnover. That means it will make a great difference to companies if they begin to find it more difficult to export their leather and leathergoods.
The first policy adjustment came in 2005 and the most obvious change in the two years since then is an increase in the price of raw hides, not only domestic hides and skins but imported ones too. This seems to have affected good-quality, high-priced hides and poor-quality, cheap ones in equal measure, with both types of raw material increasing by between $15 and $20 a piece. Some items have increased by more than $30 per piece. Once the new policy comes into full effect next year, costs will increase further by at least 23%. This could prove to be a fatal blow to those tanneries that rely on imported hides.
Currency appreciation
Export-oriented companies are also suffering from the appreciation of the renminbi. A manager of a footwear trading company in Guangzhou complained recently of having lost several million dollars in a year, only because of exchange-rate differences.
Nearly 40 footwear trading companies in Guangzhou have already closed down for this reason. It seems that only companies that are big and strong have the capacity to endure such losses. People have admitted that only the strongest will win, while smaller, weaker players will be washed out.
Finished leather market
It is a seller’s market for good-quality upper leather, whether imported or domestic. Full grain, dry milled leather, calf leather, brush off and nappa are the best-selling items.
Oil and wax finishes are still very popular in the medium to high-class men’s shoe market. At present, there are more and more players crowding into this section of the market. Some are overseas brands, some are Chinese, but no matter the origin, good quality is necessary. To ensure a superior quality, footwear factories know that they need to buy good leather.
But to meet the demand of the high-end footwear market is not easy. What tanneries have to do is to solve the problem of a lack of good-quality raw hides.
There is still some demand for PU and synthetic leather; these materials are still popular in the low-to-medium women’s footwear and accessories market.
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