US Perspective—27.01.09
27/01/2009
The Jacobsen Commentary and Market Opinion—27.01.09
Courtesy of www.thejacobsen.com
There were few trades reported towards the end of last week, with most thinking that the market is steady and should stay in this
range of trading for a while to come. One pundit thinks the market is a little sloppy, while at the other end of the spectrum, we have heard reports that business is good. Our opinion is the market is steady with HTS around $35 to $36.
In the US’s largest export market, China, many tanneries are closed for the Lunar New Year, with the lucky tanners lying on a beach in Australia or Thailand. A few upper shoe tanneries wanted to buy small volume before the holiday for arrival in February, March, and April. There were a few trades reported at around $42 and fewer at $44 CIF for HTS. Butts and natives are trading in the same range. Packers want $45, but tanners have a different idea and are holding back with recent attempts to raise prices largely resisted.
The hide market will likely be stuck in this trading range for a while with packers trying to bring it up and tanners holding back—each waiting for the other to blink. A few traders are hopeful that prices will go up after the Chinese New Year, but the economic stage is not set for a huge rebound.
With automotive business off 30%-40%, side leather shoe business down around 20%, and furniture in the dumps, how can anyone expect much change on the demand side?
Thursday’s Wall Street Journal reported China’s government as saying the economy expanded 6.8% in the fourth quarter of 2008, compared to the same quarter the year before, confirming that the downturn has cut growth rates nearly in half in a single year. Full-year figures from the National Bureau of Statistics said that growth for 2008 was 9% compared to 13% in 2007.
New president
Tuesday’s inauguration of our 44th president was a historic moment for our nation as our first African-American Commander-in-Chief begins his monumental task of leading our nation through the worst economic crisis since the depression of the 1930s.
Challenges are plenty, but this week is the beginning of a new hope for the US—and perhaps the world—that we will move to a better place and soon pull ourselves from this economic crisis. Unfortunately, it was not a friendly day in the equities markets with the Dow Jones Industrial Average (DJIA) plummeting over 330 points, falling below 8,000—the worst inauguration in DJIA history. The good news is that the DJIA won back most of these losses later in the week, driven by a rebound in the financial sector.
Specific to leather, Coach, the largest US maker of luxury handbags, reported that second-quarter profits dropped 14% from last year. Chairman and chief executive office, Lew Frankfort, said: “Despite this being the most difficult holiday season our company has experienced during my 30-year tenure, we were able to report second-quarter sales and earnings per share that were only slightly lower than the prior year.” To reduce costs, Coach plans to cut by half its typical 40 new-store openings per year in North America during 2010.
Motown blues
The Detroit Auto Show was nothing special, the noticeable exception being several missing participants, Nissan being the most obvious. The small three—GM, Ford and Chrysler—all toned down their displays and talked of new energy-efficient vehicles, hybrids and electric cars. The future for these dinosaurs sure looks good if only we can be patient and the government has enough money.
While the economy continues to impair new car sales it cannot claim to be the root-cause of the demise of the US car companies. Their problems have been accumulating since the 1980s and now being surrounded with the global financial mess, only the strong will survive. The bigger issue raises the question whether we can become accustomed to a sub-11 million light-vehicle year, and the decline in the consumption of leather as a seating material.
From 2002 till 2007 we witnessed unbridled growth in leather’s penetration. Historically this option had been associated with high-end or luxury vehicles, and the corresponding design and supply was traditionally based on HNS, which provided consistent and expectable quality yield, efficient conversions from raw to finished, and consistent cutting utilisations. As automakers moved the battleground away from under the hood to the interior, leather was offered as a product option and featured across the entire range of vehicles, from entry-level to the top of the line.
Leather suppliers (tanners) stood in line to match the competition and subsequently sourcing gravitated to the cheapest origins and unfortunately so did quality and performance. While the car-buying public was trapped in a purchasing frenzy, the hint of leather matched their needs. Even the definition of leather was debated and bastardised. Seat surfaces offered multiple combinations of leather wannabes, and even splits got into the action. Unfortunately car seats, after several years of multiple ingress and egress, actions left their bolsters looking tired and buyers wondering why leather was held in awe.
Peak production
Global light-vehicle production reached its peak in 2007 concurrent with leather’s highest vehicle penetration. While numbers are hard to accurately assess, we project that based on global sales of around 65 million vehicles (and estimating leather penetration in the major markets such as the US, Europe, Japan and China), the total leather usage in world auto production reached around 30 million hide equivalents, which based on a global supply of around 250 million hides, reflected a 12% market share.
Based on the latest projections for auto sales in 2009 dropping across the world by 30%, we conclude that 9 million fewer hides will be utilised in vehicles compared 2007.
But we also need to consider whether leather will return with the same excitement and enthusiasm embraced during the go-go years of 2002 through 2007. Consider that, as disposable income diminishes, the public will be looking for a stronger value proposition, and will expect cost-effective solutions, as evidenced by Wal-Mart's success while alternative, luxury-type brands have fared less well.
Auto leather will need to return to providing a secure and reliable seating surface that reflects the incredible aspects of this man-made raw material. Stucco-buffed needs to take a back seat to the pleasing aesthetics of a tight full grain, semi-aniline rich looking nappa leather.
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