US Perspective—20.01.09
20/01/2009
The Jacobsen Commentary and Market Opinion
Courtesy of www.thejacobsen.com
Market activity
Market activity was slow at the start of the week with few trades reported. Cows sold slightly down from the previous week with natives between $13 and $15 and brands from $8.75 to $11.
In midweek, trading was still light, with prices stable, with some contacts also reporting interest at low-to-steady prices.
Talk emerged from overseas that too many contracts have been cancelled and tanners will need to re-enter the market soon to cover orders. Cows were reported at $20 for northern dairies and $11 to $12 for northern brands. Branded steers traded from $29 to $32.
Hides continue to trade in a fairly tight range and will probably stay at this level for several weeks until the Chinese Lunar New Year (January 25–February 20) is over. As China approaches the Lunar New Year, most Chinese tanners have very little interest in discussing new business unless it’s at lower prices.
For big packer heavy Texas steers, tanners’ interest is around $40 to $42 delivered, against a backdrop of offers of $44 to $45. There were very few official offers so far this week from big packers. Sources indicate that the last volume business for steers was around $42 to $43, but prices that could sell last week are finding resistance this week.
Information regarding tanners’ hide inventories is contradictory with reports of ample stock with no need to buy in earnest for one-to-two months, and other reports that too many orders have been cancelled and need to be refilled.
Industry picture
News in the industry was made on January 8 as Wolverine World Wide announced its strategic restructuring plan. The plan includes consolidation of key distribution and global operations functions, realignment of the company’s domestic manufacturing operations, consideration of a range of alternatives for the, company-owned leather business, and corporate cost-reduction programme.
The evaluation of strategic alternatives for the company’s leather business is likely to result in the outsourcing of leather processes and the closure of its Rockford, Michigan, tanning facility.
Demand from tanners goes down
“I’m shrinking” is often a misreference to a famous line from the Wicked Witch of the West in the Wizard of Oz, but it nevertheless appropriately conveys the diminished leather requirements faced by tanners around the globe at the moment.
The abundance of capacity is blatantly clear and this predicament, which started with the decline in furniture and automobile sales, has now infiltrated shoes, handbags, and a wider array of leathergoods. The cause and effect has also now begun to seriously permeate chemical companies as these organisations scaled their operations for volumes no longer achievable.
Recent news of a large chemical company entering Chapter 11 protection against bankruptcy, and also questions over Dow Chemical’s acquisition of Rohm and Haas, highlight the challenges being faced by allied industries to the hide and leather markets.
Ups and downs
But on that note, what happened to the supercharged chemical increases the leather industry was badgered with the first half of last year as the world prepared for the Beijing Olympics? You may recall the time when oil was approaching $140 a barrel, corn was nearly $7 a bushel, and chemical companies were sending notices of increases almost daily.
Commodities were in demand and it was not uncommon to receive an increase in the form of a notice stating, ‘We are assessing you with a $(fill in the amount) surcharge, but since you are such a longstanding customer, we will continue to supply you’. In all, chemical prices for tanning processes from bluing through to finishing, tanners experienced increases around 18%–20%.
The most common explanation for these increases was the high oil prices, fuel costs, the insatiable demand for fertiliser driven by ethanol, and the weak dollar. Today oil is less than $40 a barrel, corn around $4, ethanol is barely talked about, and the dollar is stronger than a year ago. But unfortunately, tanning chemical prices have failed to return to anything close to the levels before the 2008 increases. At best, prices have fallen back a couple percentage points. Chrome, a major chemical used in most tanning operations, is currently under pressure for price increases according to sources in the industry.
Some of the commodity chemicals indexed with oil and natural gas have fallen, but so far the chemical industry has shown resilience and has been able to avoid substantial give-backs. One tanning chemical supplier (wishing to remain anonymous) said a frequently asked question is, ‘Why haven’t chemical costs followed oil prices down?’ He responds that the prices of his key supply ingredients have not been cut back, but if this was to happen, then it would be a corporate decision based on margin and market share.
One possible explanation for how prices have held amid the recent global recession is that end-of-year announced cut-backs in production by major chemical companies such as Dow and BASF. These may have been effective in holding supply back at levels keeping pace with reduced demand. Up till now, chemical manufacturers have been able to keep their price increases mostly intact. Will they be able to maintain this position or will the prolonged anemic economy finally force prices back?
Unfortunately for the time being, relief for tanners regarding chemical pricing is unlikely until this question is resolved.
Meat in the mix
The meat-packing industry is not immune from the ripple effect of current economic times. Tyson’s change in leadership and the off again-on again JBS purchase of National Beef are merely two events that have recently surfaced. It’s quite true that from Dorothy’s perspective, we are no longer in Kansas, and that the world is surely different and rapidly changing. Last October’s perfect storm altered the playing field and, at least in the short term, it feels like we are all on the yellow brick road going somewhere. But unlike the fairy tale, this is reality and financial impact is hurting all travelers.
In December, unemployment in the US increased by 632,000 to 11.1 million, or 7.2%, which means that the figure has grown by 3.6 million people since December 2007. Rising jobless claims are draining unemployment funds, with the following seven states leading the way: Michigan, North Carolina, South Carolina, Ohio, Rhode Island, Oregon, and California.
Michigan has a 9.6% unemployment rate and 103,000 more jobless residents than it did a year ago. More than 400,000 Michiganders are claiming benefits. The average benefit is about $295 a week for a maximum of 26 weeks. The federal government granted two extensions—one in July, another in November.
Bring it back
Considering the direct and indirect costs associated with the numbers we are seeing at the moment, there is a clear case that should be made to the government to encourage and provide meaningful incentives to bring back basic industries to the US. Asian labour costs together with the logistical challenges and supply chain management can easily find competition in the US, especially when considering the pain and suffering the hide industry endured as a result of ‘Oktoberfest’.
Simply put, the Government bail-out can’t help the leather industry unless we are willing to provide funds to Mexico, China, Vietnam, and Indonesia. Jobs need to return to the US, therefore, the message is clear: President Obama, spend the money at home!
Shoe companies and seat companies, (memo to Nike, Timberland, Wolverine, Lear, and JCI) come back; all is forgiven—please note that the North American Free Trade Agreement includes the US. Let’s get people working by shifting shoe, furniture, and auto-leather manufacturing back to the US. Then the hide market would stop melting.
Some shoe upper tanneries expect business to be good after the New Year, but many others are taking a more cautious approach. The forecast predicted so far has business off from 15%–20% from 2008, which is likely to be reality for the first three-to-four months of 2009. Depending on the US job and housing situation, the first upside potential seems to be in the June-July period.
The basic fundamentals of the current market have not changed. Daily reports reflect a worsening economic condition and give credence to the lack of movement at retail. While the docks in Asia may have been partially relieved from the various hide containers, the same is unfortunately not true for piers in New Jersey and California. Today these quays are festooned with untold numbers of imported vehicles waiting patiently for buyers.
As indicated in previous market commentaries, hide inventories at producers and third-party locations are sizeable and every day the beef business moves forward irrespective of the impact on the leather business, therefore presenting a challenge to all sellers to move the hides.
So amid all this pessimistic talk, we cannot help but remind all parties that hides today are cheap. In some cases we can find no person who has memory of BRC at $11. HNS at $34 are lower than they have been for decades. HNH, BRH, BBS, and HTS appear to be all on sale. While it is true that lower leather prices will not be the spark-plug that ignites automotive sales or find legs to support the furniture business, these two business segments are only relatively small potatoes in the leather world.
Shoe consumption is at the heart of the tanning industry. Let’s take this step together and help make a difference by purchasing a pair of leather shoes. Tell a friend.
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