Market Intelligence - April 8
08/04/2008
MARKET INTELLIGENCE—08.04.08
Macroeconomics
The last two weeks saw little improvement in the financial markets. The news about write-downs due to the subprime crisis in the US have shifted into Europe with German and Swiss banks taking the lead.
The testimony of the chairman of the US Federal Reserve, Ben Bernanke, to Congress last week has not really convinced the financial world that there can be a short-term improvement of the state of the US economy.
International institutions have cut their expectations for the growth of the global economy. There is still decent growth expected, but most of the dynamic will come from the emerging markets.
Commodity prices were again bouncing up and down and following in particular the movements of the US dollar.
The greenback was on a rollercoaster ride as the financial markets showed some initial hope that things in the US would get better soon, perhaps enabling the Federal Reserve to consider further or deeper rate-cuts. With the sharp fall of the dollar in the first quarter a few speculators probably changed their positions from short to neutral, or even considered starting to buy the greenback in anticipation of a recovery later this year.
Markets remained nervous however and did not support the market any further; the recovery was, therefore, short-lived and ended at EUR 1.55 for the moment.
Stock markets continued to sidestep. The nosedive of the market in Shanghai, which has lost more than 30 % since December, is an increasing worry. This could have a negative impact on the Chinese economy eventually. Others think it is just a sound and normal correction and will have little impact on matters in the new superpower.
Gold lost a bit of its shine while oil is sticking at the USD 100 per barrel mark on the news that US stocks have fallen more than expected.
Market intelligence
All eyes were focused on the APLF event in Hong Kong last week. As usual at this time of the year, a great number of people in the industry travelled to Asia and was trying to put together a better picture of the situation the industry is in, or—at least in case of the raw material suppliers—to try to sell material for the second quarter.
Most of the interest was focused on developments in the US cattle hide market which is traditionally the benchmark and the trendsetter in dollar terms for the state of the industry.
While the last weeks had already delivered breathtaking numbers, there was further surprise last week—the number of sales was completely out of line with the feel most in the trade had gathered over the last few weeks. A lot of people were scratching their head about the almost three million hides sold over the last four weeks.
In the end there are only a few comments to be made about the figures, which we consider to be at least almost correct. One thing can we can assume is that they confirm that leather demand remains globally solid and production at least in Asia remains strong. Consequently we have also to believe, that tanners must be in the possession of either good orders or they are reasonably sure of orders coming in soon.
There was confirmation already from most retail markets that the 2007 retail performance in shoes and leathergoods was strong. The cold winter in China might have added to a decent clearance of winter boots in this large consumer market, and when the shelves and stockrooms of retailers are clear their courage to place new orders for the coming season is always quite good. This is basically the same the whole world over.
The situation on the currency markets and the price levels of other markets may have added to the bonanza. Prices for US material have been competitive and it seems, that the suppliers from the US were smart enough to take the opportunity to sell without asking much higher levels to open the doors for other supply origins again.
Additionally we might also have to consider, that part of the game is the usual ‘paving the way’ for the negotiations of leather prices which are traditionally easier for tanners when they can approve the situation on the raw material markets by some hard facts, called statistics. Lastly, hide prices are significantly lower than last year and, even with rising production costs, the present levels should be much more comfortable than they were a year ago, considering that leather prices haven’t moved by much.
So, for the key players in the market and the mega-producers the situation might not look as bad as a lot of complainers may think. If one studies the 2007 results of the publically listed producers of shoes, luxury companies and so on, they have been pretty good and if the companies could just repeat them also in 2008 nobody could actually complain. With todays parameters such as reduced raw material cost versus increased production cost levels there should be a good chance for this to materialise if total sales numbers can be repeated. From the large athletic and casual footware manufacturers one can hear, that their budgets and forecast for global sales 2008 are indeed no lower than what they had achieved the year before.
High hide sales
Many are still wondering then why the export sales of US hides are so substantially higher than in the first quarter 2007. This might be related to various factors. The main one might be that US prices in the same period last year were higher on average, and other sources were taking advantage.
Brazil and Europe, although no reliable statistics are available yet, had been more attractive in price and should have had a higher portion of the total sales in particular to Asia. Lower slaughter in South America and also the attempt to sell more crust and finished leather rather than wet blue might also play a role in the equation. The currency effect is one important factor that we have mentioned many times before.
Apart from the sheer number of sales we noticed a number of other interesting developments talking to a number of pundits during the APLF show. As far as China is concerned a number of people confirmed the restructuring trend in the tanning industry there.
Despite all the reports of closures of tanneries, the strong seem to be getting bigger and the total size of production is not shrinking. This is even more remarkable as many are reporting, that due to the rising labour cost in China, the increasing control of environmental issues and in some cases also unfavourable tax conditions, quite a significant trend to relocate production can be seen.
Countries such as Thailand and Vietnam are either growing fast or getting back some of the business lost to China in the past. Statistics in Thailand suggest, that the production in the Samut Prakarn province is today pretty close to what is was at the peak time in the 1990s. A lot of well know names have decided to produce at least wet blue there and there are also reports of a number investigating seriously the possibility of shifting more production to this country.
In particular automotive and upholstery tanners are considering Thailand, while Vietnam is more popular for side leather production.
Other people talked about there being real possibilities in the remaining countries of south east Asia too. Shoe and leathergoods manufacturing is said to be growing in Cambodia and a number of people are saying that as soon as the political situation in Myanmar is morestabile this could be the next destination for shoe production. As is logical, tanning will follow wherever the production of manufactured goods from leather takes place. However, this might be something for the next decade.
Also talking to tanners and manufacturers in the Middle East we could hardly find anyone who was not reporting rising productions and interest and also here we are sensing either business coming from China or finished product buyers deciding intentionally to use other sources than China at the moment. This might also include the simple growth in these consuming markets which is todaymore focused on domestic consumers.
Another focus of discussion was the situation of the split market. The long-awaited recovery of split demand has not come around yet and a number of traders and producers were complaining bitterly about the situation, which is probably the worst for a long time. Some went even that far to say that splits could be considered as waste as there is no market and price for a large part of the production.
So, inventories are still rising and everyone is waiting for any kind of a new trend which could absorb the surplus of production and help to bring split credits back to reasonable levels.
Talking about the possibilities for a recovery some were considering the automotive industry as being a potential target. A number of brands are experimenting with splits at present and some smaller use is already being reported. However, people familiar with the industry and its requirements confirm, that the automotive industry would do anything to reduce prices for materials in their massive attempts to lower the cost of production. One should be pretty cautious about the potential of splits in cars because, looking at their higher production cost and the reduced cutting yields, they are far less attractive than they might look on paper these days.
Automotive could mirror upholstery on splits
Apart from the cost situation many people are also warning about the use of splits in automotive. One industry figure we spoke to recalled—in our opinion fully correctly—what happened to the trend in furniture upholstery over the past years.
For the same cost reasons more and more split was used in furniture production and the consumer was made believe he was getting the same quality and prestigious product he was expecting. Well, the buyers decided quite quickly that leather is not always the same and so leather furniture in the mass market lost quickly a lot of its shine and image. In the medium- and lower-end of the price range, it has lost quite a lot of its reputation and sales.
A similar trend could be expected in automotive if the industry is seriously planning to use splits in seating. This might also be an issue for the future as it would still take quite some time before buyers would their experience the difference. Let’s hope that it is not going to happen.
A lot of discussion in Hong Kong also centred on the future of smaller tanning business es in China, who also face intensifying environmental controls and the upcoming Olympics. In particular tanners in Hebei province are mentioned due to their close location to Beijing. Still sharply falling number of available pigskins in the country is another factor.
Most of the Chinese are playing the impact of the Olympics down and state that we may face some problems between the end of June until September, but after that most of them believe that the situation is going to normalise quickly and their production will be tolerated again.
Well, for anyone outside China it’s difficult to decide, but we tend to believe that they might be a bit too optimistic. All we can learn from the media and officials suggests that the controls and government policies are getting more serious and tight.
Pigs in demand
The situation on pigskins has already been described in the past. Due to the sharp rise in pork prices ever falling numbers of pigs are flayed reducing the numbers of available skins for tanning substantially. Many tanners using pigskins in the past are not finding quick and easy substitutions. Lining producers are trying to switch to goat and sheep while garment leather tanners are trying anything cheap to fill their drums. However, it is still difficult to see how these alternatives could compensate for the ten million missing pigskins. This might give splits a chance eventually.
There was good news also from the sheepskin business. Nappa leather and wool returns are still the driving forces behind the strong demand for any skins that are good in size and offer a decent return for wool. Prices for these kind of skins are still climbing slowly and demand still outpaces supply.
For double face skins the situation looks still not so bright. The demand for double face leather and garment for the next winter season still carries big question marks. For Western countries there is no indication for a recovery of demand and the warm winter in Europe this year will also not attract buyers for the next season.
By the same token, one should assume that the extremely cold winter in China would boost interest, but we learned that, due to the abundant supply of cheap fur material and their higher prestige in China and Russia, the outlook for double face lambs does not appear overly optimistic there either. If the worst comes to the worst double face material could end fetching lower returns than nappa material for what we believe would be the first time in history.
With the real lamb slaughter season starting now in Europe we will know soon if this is really going to happen.
For the coming weeks the normal ‘after Hong Kong’ pattern should materialise. People will travel home and sort their trips out and Asian producers will also take a break from all the visitors and talks they had to go through over the past weeks.
Most of the immediate hunger should be satisfied and just some of the latecomers or those who were convinced that they can buy cheaper after the fair than before could be active in the next couple of weeks.
In total, activity should slow down. For non US dollar suppliers the further trend of the greenback will play an important role for what they have to expect soon. For the moment we think that most markets are on a solid base and only individual grades might have room room for manouevre. For the general market we believe that the room for price variations remain very limited. Higher prices are unlikely to be accepted by buyers, while much lower priced goods don’t need to be takes. That’s what is normally called ‘balance’ in the market.
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