Market Intelligence - 27.01.09
27/01/2009
Macroeconomics
Observing the global economy at the moment is still pretty boring. In the end the financial issues have come to have a very tight grip on the market situation once again. Every week we hear of new problems in banks, not to mention in national economies.
Governments assuming control of banks or other financial institutions, plus all the stimulus programmes they have come up with— including guarantees for some industries—is raising questions more intensely than ever about how strong national economies can be. Many countries are putting so much debt on their shoulders and issuing so many guarantees that if anything goes wrong it is quite questionable if all this debt can ever be repaid. It is not popular to raise this issue, but in the end we could be confronted with the complete reorganisation of countries’ finances. Politicians and bankers rule this option out completely today, but other things that they have they ruled out in recent past months have come to pass.
The US has got a new president and it seems there is generally great relief that the Bush era has finally come to an end. No matter where one stands politically it was quite obvious that the Bush administration had no answers to the problems. We will have to wait and see what the months and years ahead bring to know if all the hope expressed in the new president and his administration in recent days is justified. The least we can do is wish him good luck and hope he makes competent decisions to handle all the problems he has taken on since last week.
The general economic data that is available remains pretty uninteresting for us, at least until the financial markets have stabilised and the data delivered offers a more serious reflection of the general trends in economies.
In the meantime interest rates are continuing to slide, stock markets have lost quite a bit of the optimism we saw at the beginning of the year, and the number of big corporations—in particular in the automotive industry—facing massive problems to survive is still increasing.
With rising problems in the euro zone, and countries like Ireland, Spain and Greece showing significant economic trouble or political instability, tensions within the community are growing and the global financial markets have decided to move away from the euro and to favour the US with its new president for a bit. It seems at the moment that the markets are quite happy to have returned to the currency equations of November last year and are taking a wait-and-see attitude until they decide which of the big two to favour with investments and confidence.
Also the global powerhouse that is China is facing economic headwinds. Growth is falling below 7%, while the country needs at least 10% to prevent general economic and social problems. The slowdown in China is also raising fears about the renminbi and that Chinese banks could be threatened more than ever from bad loans.
The dollar has gained against the euro and is trading below $1.30 again. Oil prices are still consolidating around the $40 level and gold prices are still holding in a range between $800 to $900 per ounce.
Market Intelligence
Trading activity in the last two weeks was reasonably quiet, although there was a bit of a difference between the situation in the reports received from Europe and the US. While US suppliers seemed still to receive adequate enquiry, in particular from Asia, European reports were much more flat and even the firmer US dollar could not stimulate demand for hides from the old world.
Reports and export statistics from the US left the impression that most of the weekly kill could have been moved and stocks were not continuing to rise. However, we have learned in the last year not to trust too much in the paper statistics delivered.
In Europe the situation has deteriorated quickly in the past weeks and the bit of confidence we saw at the beginning of the New Year was has faded. In Italy there were reports of late payments again and tanners are still desperately complaining about their clients. A lot of invoices that were due at the beginning of January have been postponed into February and in some cases even March.
One of the leading calfskin tanners in Northern Italy had to find an agreement with banks and suppliers to protect against bankruptcy. The failure of one large European cut-and-sew operation, a supplier of the automotive industry, has also cost a number of European automotive tanners quite a bit of money.
All this is in addition to general rumours and the constant cancellation of credit cover, which are raising fear within the industry in a dramatic manner. It is like in the financial markets where hardly anyone trusts anyone any more. This atmosphere is hanging like November fog over the industry and this paralysing trade more and more.
Raw materials market hits bottom
In many conversations throughout the trade in Europe everyone is convinced that the raw materials market has reached bottom for better quality European hides. People are also in general agreement that further price declines would not stimulate demand any further.
There can be no question that the prices for premium-quality hides that are ranging today anywhere between EUR 0.50 and EUR 1 cannot be beaten by any cheaper raw material from anywhere around the globe. In addition, business has not come to a complete standstill. Some of the dominant industries, in particular automotive, have reduced the demand for raw material by such a big amount that it seems there is no demand for these hides anymore.
This is of course not true. It just needs a certain period of time until the normal economic rules apply again, and the general global market comes back into line with calculations. It might still need also some technical adjustments but sooner or later economics will take over and more of the traditional privileged hides will find new homes.
If this theory is proved right, it will squeeze more and more low-quality materials out of the market and that will bring supply and demand back into balance again, probably later this year.
Mixed feedback
Speaking to some manufacturers of leather products—that is, shoes and upholstery—the feedback is quite mixed. On the positive side, there is still little sign that shoe manufacturers and retailers are as scared as everybody else about the present situation of the economy. Sales so far have been reasonably good and, thanks to the pretty severe winter in the northern hemisphere, almost everyone is confirming a good clearance of stocks. So many of them are torn between what they think they should do and what caution and the general economic outlook seem to suggest.
If the first prevails, stocks would be replenished sufficiently and quickly. But if caution wins out, decisions will be postponed because everyone will want to know how badly private consumption is going to be affected. This would continue to delay orders, and move the problems on to manufacturers.
Mixed feelings from Cologne
The upholstery industry was watching with great interest the results of the IMM furniture fair in Cologne, which took place last week. There were a lot of mixed emotions. The positive people were talking about much better interest than actually expected and were pleased by the quality of the visitors. The negative ones were talking about empty spaces and a substantial decline of visitors this year.
As far as new trends are concerned, most people mentioned that very little that was special was seen on the stands. The colours were basically the same as last year, nobody talked about any real new leather types and nappas still dominate. But it may be fair to talk about a general trend to better, more natural leathers, and this is hardly a surprise with the present situation in the raw material market. This is also good news, because as we have discussed already in previous issues, we need to upgrade the product to attract the consumer again.
Headaches
In truth, the industry still has the same problems that have been causing headaches for the last couple of months. Nobody can predict consumer demand in 2009, and logic is telling everyone to be extremely cautious, with the massive rise of unemployment we have to expect. In addition the never-ending problems of the financial markets are doing little to encourage confidence at the moment. For enterprises the big risk is that nobody knows what is going to happen with the banks and their willingness or capability to lend money. One could even assume that a company doing comparatively well in this deep crisis might be confronted with decisions from their bank that might make it difficult for them to continue.
The right decision
Everybody knows, that the right decision would be to continue production, to take advantage of lower raw materials and general production costs to be well prepared for the better times, which will definitely come eventually. However, timing is the issue, and if you don’t know how long you have to make strategic decisions, and the turnover you need to cover your costs cannot be achieved, it is pretty difficult to do what normally should be done.
There is no news from the split market. Splits used for the leather production are still finding it pretty difficult to find a home. This is no surprise if you think about the cost of grain leather today. This means that the only option left for splits are specific niches products. Gelatine splits, in particular in Europe, are still in good demand and are meeting tanners’ expectations on price, but this all looks pretty strange considering what a whole hide costs today.
We are hearing more and more stories about hides, in particular from South America, being just limed for gelatine production and the first containers are said to have been shipped to Europe for tests. If this is true, and the performance of these splits or hides meets expectations, one has to assume that the price for lime splits in Europe will have seen their peaks already.
Problem skins
The skin market is as much of a disaster as the hide market. With most Chinese skin tanneries having come to a stop and the demand for nappa leather for garment production almost inexistent, while the interest in goat skins remains pretty dull. At least goat skins are still receiving some interest because they are a fashion item. With China now on holidays for the next two weeks, it will be a month or so before we know if there will be any easing in the congestion of the skin market.
The coming two weeks will most likely be pretty quiet. In Europe the trade will deal with the present problems of payments, credit insurance and bank loans, and discussions will continue over how to proceed and how far the restructuring of production is going to go.
A lot will depend on any recovery in leather orders, and on producers being able to maintain at least a minimum level of production to cover their overheads and to protect themselves against additional cash-flow problems.
Asia will most probably be reasonably quiet. The Chinese holiday season seems to keep production closed until at least February 2, and in some cases even a week longer. It does not seem that many tanneries still hold a large open-to-buy position. Quite the reverse; it looks pretty much that the strong hands have already taken advantage of lower raw materials prices. Anything that could come out of this part of the world would be rather speculative buying than actually raw materials needs.
That leaves us just with bits and pieces from the other markets. We think most people will be interested in obtaining news from the leather fair in India next week. India is also one of the centres of dress-shoe production, so it should be possible to get a better understanding of the market situation from the appearance of footwear brands discussing their programmes for the seasons ahead with their manufacturers in India.
Basically, we can’t see any significant movement in the market or in prices. There is absolutely no indication that demand could become so strong as to outpace supply in the near term. We would definitely require either a sharp decline in supply—which we believe is going to come, but gradually rather than in big steps—or a massive and longer-term raw material buying to clean up existing abundant stocks, and to give sellers the confidence and courage to ask and to insist on higher price levels.
There can be no question that a moderately rising raw materials market would probably be the best way to regain confidence and to trigger more leather orders because manufacturers would become afraid of even higher leather prices later in the year.
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