Market Intelligence - March 10, 2008
10/03/2008
MARKET INTELLIGENCE – 10.03.08
Macroeconomics
The troubles in the US economy persist and the only answers that responsible commentators there seem to be proposing are to lower interest rates and support the consumer with stimulating packages.
We have our doubts that either of the two is suitable to resolve the fundamental problems, but time will tell. For the moment it will not raise the spending-power of the normal citizen, who has to pay the mortgage on a home he could never really afford.
In the meantime it is creating an environment where the Federal Reserve has already lowered interest rates and seems likely to do so again in future. This is injecting more capital into the wrong pipelines.
The speculation that is going on at the moment is pushing commodity prices higher and increasing pressure on the US dollar. Selling the dollar and buying up gold and oil is the game of the moment and this is taking its toll on the markets. Oil and gold are climbing from record to record while the dollar is falling ever lower.
It is pretty obvious, that we are creating new bubbles which will burst eventually—like all others before—but this time creating probably much more damage to the global economy than any ever before.
Regular readers will remember our worries about inflation from some time ago, when pundits and experts were still showing faith in the statistics and the story, that the core rate (excluding food and energy prices) is the only important figure to watch. In the meantime the situation has changed and national banks have little option other than to hope for the bubble to burst to drive energy prices lower. Otherwise we could have some good fun with slowing growth and rising inflation.
In the meantime we see the normal people in the street suffering from rising energy and food prices, which have been reducing the budget available to buy other products continuously since the beginning of 2007. The pace of this drop in consumers’ budget has accelerated since then.
In the meantime oil has hit almost $105 a barrel and the euro has climbed to levels not far off $1.55.
Market intelligence
We actually don’t know what can really move this market. Nor do we know if there will be any kind of convincing news before the APLF event in Hong Kong at the end of this month. Nothing has happened in the last two weeks to change any of the present market patterns we have to deal with. Business remains regular for the well established enterprises, but general demand still seems down moderately for various reasons.
Trading activity was at just about standard levels. Hides and skins were moving and it was enough to prevent the market from any sharp decline, but at the same time it was far from delivering any major optimism or support for the bulls in the market. Tanners with a normal order book are just replenishing what they need for current production. Others are taking a more prudent approach.
With the declining US dollar the situation for the European tanning industry is getting more difficult by the day. Even the escape to buy dollar-based raw materials is reaching its limit now because the production costs are still calculated in euro. Any tannery that finds itself outside a niche that—either for reasons of size or reasons of sheer volume— cannot be covered by lower-cost overseas production is having an increasingly difficult time.
Apart from the problems of calculation and profits, many are also reporting that the order intake is still far from being fully sufficient. Upholstery tanners in particular are feeling the pain more than ever before. The European season is quickly coming to an end and, with the peak already past, tanners cannot really expect that things are going to get better before the summer.
Most manufacturers are depending on the European consumer market, but even this market is not actually delivering much hope for the remaining production time until the summer break. Markets in Europe are suffering from the rising cost of food and energy. In countries such as Ireland, Spain and the UK the rising difficulties in the housing markets are also making their mark on consumer business. The other large markets in Europe such as Germany, France and Italy have never really taken off and can’t really compensate or offer any stimulus.
So, with the problems of the US consumer market, a lot is left again on the shoulders of the emerging markets and in particular that of China, which seems today still probably the strongest consumer market in total.
Better news on hides
If there has been any good news in the last two weeks it has come from the market activity for US hides. Suppliers and sources in China have confirmed a decent amount of activity, indicating, let us hope, the long-awaited replenishment of inventory there.
This might be the result of the recent shoe fairs, which confirmed—despite the general subdued mood—a normal or even good amount of interest from wholesalers and retailers. What was probably even more important was the confirmation that finally producers were able to raise prices. Many buyers are still trying to give the impression that there was no shift, but in private higher prices have been confirmed by manufacturers and retailers.
With the orders in hand and the prices increased it seems that the leather pipeline has gained a bit of confidence and tanners were willing to replenish their stocks. But what applied to the shoe business could not be said for the upholstery sector. In Europe tanners are fighting for orders in a shrinking market and—as they normally do— this battle is fought on price. In China export- (that is, US-) oriented enterprises are suffering from the tiring market consumer market there. It doesn’t seem, that this can be fully compensated by better consumption in mainland China, but tanners and manufacturers are benefiting from the appreciating renminbi against the dollar and rising consumer prices in China.
Tanners and manufacturers are both confirming that well established domestic businesses are presently having a good time with sufficient margins and good orders.
Pollution pressure continues
Talking about China, many in the business are talking about the ever-increasing pressure on tanneries as far as pollution controls are concerned. The greatest pressure is on production operations that do not have an official licence. While the Chinese central government and local governments at one time went pretty easily on these companies, the situation has changed since mid-2007 and life is becoming increasingly difficult for ‘unlicensed’ operations. The results have already been seen in many tanning regions.
The answer of many enterprises is either to shut down, to invest to comply with the official standards or to escape to further remote areas of the country where local administrations, looking for investments and jobs, are willing to turn a blind eye to pollution. Lastly, a number of the larger operations have moved beamhouse operations abroad to countries such as Vietnam, Cambodia or Laos, or are in process of doing so. If Myanmar had not suffered social unrest during 2007, it too might be featuring in this picture. It was inviting investors, and shoe manufacturers and tanners had already carried out intensive research regarding investment opportunities in that country.
There is another important market factor in the Olympics in Beijing in August. Although no official statement has been made, many manufacturers in what we might call the ‘not so attractive’ industries have said they would not be surprised if water and energy supplies became restricted without notice if the authorities decide this is necessary during the games. The tanning industry is almost certain to be one of those on the list to suffer from this.
Many tanners are watching the situation with great care and interest. They have not ruled out the possibility of reducing production in anticipation of what might happen in the month of August.
Consequently the outlook for the coming months is a bit cloudy. The flow in the leather pipeline has certainly slowed down since spring 2007. This business has traditionally been good at anticipating and it has been a good indicator once more of the general economical trend. In addition the industry is fighting with a number of structural problems at the moment. Still, the global consumption of consumer goods is not in any particular decline with the emerging markets still compensating well for the problems in the ‘old economies’.
Split turmoil
The split business is still in absolute turmoil and probably best the best way to describe it is as a disaster. There is still no sign that the crisis is over and we at least cannot see any light at the end of the tunnel.
The skins business remains still the only real bright spot on the scene. The shift from light bovine material to skins is still having its effects and China in particular has absorbed a lot of the skins that had been in excessive supply even a year ago. With calf and kid prices still falling rapidly, they are not far from an attractive level and we would not be surprised to see later this year a return of the attraction of calf and kid. In the meantime skins prices are still rising moderately and have added well to their average values of 2007. The fair in Hong Kong might offer a few more indications about possible trends.
The outlook for the coming two weeks remains pretty uncertain. Non US dollar supply markets will suffer from the weak USD and their values might decline, no matter what the general market trend is. It will be interesting to see if the flurries of business in the past two weeks will find any follow-up with the start of the travel season to Asia in the weeks to come.
We suppose that the market pattern could be similar to that of previous years. Until April we see a steady or positive mood, but, with the upcoming summer break in the western world in combination with uncertainty about the influence of the Olympics, we might have to expect a slowdown later in spring. The good thing is however, that prices have already corrected well from a year ago and the market risks are at least limited for 2008.
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