What happened this week: The period between mid-December and mid-February is becoming more and more difficult to handle. The end of the year in Europe is dominated by a higher kill, followed by a production break of almost two weeks. Asian producers then wind production down to take their vacation from the end of January until mid-February. Consequently, the two main absorbers of European hides are now taking a much longer production break within a time frame of only 4-6 weeks. This leads to a certain accumulation of salted raw material which has been made even more pronounced this year by the fact that the seasonal kill is high and demand is not as buoyant as it was in 2005 or 2006. As a result, a decent amount of salted material in certain grades is still circulating the trade. As a counterbalance, we are now facing the normal seasonal drop in the kill and the usual bottlenecks in the fresh material supply, in particular for bull hides, is now starting to occur.

The reduced kill is adding to butchers’ confidence in believing that their by-product could fetch better prices than the current realistic market value and as a result they will now play a tough game again. Those buyers who are either committed to supply fresh material or are forced to tan fresh hides are going to have a difficult time again —as is always the case when the kill falls below the set levels of production needs. As a result in Europe we are again facing a two- tier market with levels for fresh material far above those for salted material.

The whole situation has now created a bit of an explosive mixture. On the one hand there are a decent number of players who will enjoy a sharp market turnaround as many of those holding salted stocks are sitting on a time bomb in terms of where valuations are concerned, if the market doesn’t go up again soon and stocks can fetch their valuation, or close to valuation, levels. On the other hand, if this doesn’t happen in a timeframe of about 12 weeks from now it could turn into a serious problem for some. Apart from the money issue there is also the question of storage and quality, in terms of how long the hides could be kept. Fundamentally, it is again a problem of buying prices and the difference between fresh and salted material. In excess of 90% of hides in this world are not traded as fresh product and so the market and market prices are geared around salted and/or wet blue material and not the tiny niche for fresh hides. When price levels lose their connection with reality it gets difficult and buying prices at central European abattoirs — in particular for male hides — have not reflected the market realities over the last quarter, and prices have not been adjusted to real market levels. Tanners, however, also play an important role in this game. While some are unable to do so, on the grounds of pollution problems, others are favouring fresh hides far too much. The consequence: See above.

At the end of the day this situation will be normalised again, but in the meantime it is a problem. Trading was only selective this week. Bits and pieces, which are not really worth mentioning, traded at steady levels with discounts for the US$ decline.

The kill: The kill is still dropping further and in the meantime we are easily 30-35% down from the top levels. While some believe this could support the market we have our doubts and see more bad than good in it. Due to the upcoming carnival season it won’t be any better next week either.  

What do we expect: The next two weeks will be quiet. Carnival season and the Chinese New Year will cut activity. It will be interesting to see how the next round of abattoir buying will handle this situation. By mid-February we should see the normal upturn in activity until April, when the next tricky period will be lurking around the corner. For the coming weeks the market should continue to lurch around recent levels, because there is very little that could trigger any sharp move either way. Currency issues could again be a factor.

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