German Perspective 17.06.08
17/06/2008
GERMAN PERSPECTIVE—17.06.08
What happened this week: Market activity was again almost nil. Any sales were coincidental and if there is any consistent demand, it is for the standards such as heavy bullhides where a few loopholes still exist and production is easily absorbed.
The weak spot of the market is definitely the situation in China and the market there for cowhides. A lot of the leather industry in China remains blocked. Many tanning areas are almost shut down and this is adding to problems they already have with rising costs across the board and the increasing value of the renminbi, which is hurting export business.
The weak performance of the upholstery market around the globe, and a slow down in bag leather, in addition to the usual seasonal effects, have created a critical cocktail for the cow market for the months to come. Italy is unable to offer any alternative at the moment, and from the information supplied from many sources, production needs are covered well into the summer holidays.
The last hope for optimism is that, after the Olympic games, production in China will reopen and a lot of tanneries will quickly need to replenish their exhausted stocks.
This is a pretty uncertain outlook and until then, not only will production be cut, but the product and money flow along the pipeline will suffer too. There are already numerous reports of domestic payments coming in late if at all.
One side-effect is that a lot of imports of raw material in traders’ hands are turning sour, because their Chinese buyers are not taking their deliveries for the simple reason that they cannot produce. This is mainly hitting the low grades for the very cheap-end of leather production.
Consequently most of the market activity today is on the shoulders of shoe leather producers and, as far as we are concerned, the balance between market segments is still pretty much distorted.
It will be interesting to see the outlook of automotive leather manufacturers. High petrol prices are not only weighing on the demand for cars, but also shifting the demand from larger expensive and high-consumotion models to smaller vehicles. If petrol prices remain high and the trend to use smaller vehicles continues, it is going to be interesting to see if drivers will be willing to spend more money on extras such as leather to compensate for a loss of power and sound.
As negative as it may sound, business is never at a standstill and beside a few letters of credit coming in, sales during the week were again rather coincidental and focused on cheap hides. Whatever is available in heavy males is absorbed, though, as there is still a bit of spot demand every week. Apart from this, sales still are piecemeal and we repeat our opinion that, despite slow demand, most of German hides remain overvalued. The rollercoaster ride of the US dollar is serving only to offer a marginal opening or closing of the gap from day to day.
The kill: The kill continues to be reasonable for this time of the year and the latest statistics confirm this impression. The total kill until the end of April for Germany was 3.8% up on the same period in 2007 and we think that the numbers for May will be no lower. Weights however are now quickly descending.
What we expect: Basically we have nothing to add to last week’s statement. We expect the first target for a turnaround situation to be late July and until then a lot will depend on money, warehouse capacity and the mood of sellers. For the short term, we can only expect moreh of the same—little market activity with a generally negative market mood.
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