US Perspective—03.03.09
03/03/2009
The Jacobsen Commentary and Market Opinion
Courtesy of www.thejacobsen.com
Courageous move
After much anticipation from the industry, a bold and exciting move by National Beef to enter the wet blue tanning business was announced on February 26. National Beef announced its intention to acquire Prime Tanning Corp. of St Joseph, Missouri. Terms of the acquisition, which will be made by its new subsidiary National Beef Leathers, were not disclosed. National Beef has entered into an asset purchase agreement whereby it would acquire certain assets and assume certain liabilities of Prime Tanning Corp. The transaction is subject to certain closing conditions including the satisfactory completion of due diligence.
In a press release, senior vice-president and general manager of National Beef Leather LLC, Robert Hein, said: “This is an exciting opportunity for us to pursue quality leather customers while guaranteeing a premium wet blue product and a predictable supply. The Prime facility is ISO 9001/14001/18001 certified and has achieved a Silver rating for environmental excellence from the BLC Leather Technology Centre.”
At a time of industry contraction and the erosion of hide values this is a courageous contrarian commitment to the leather industry. While the current economic events circulating the major segments of our industry are pessimistic it is encouraging to find a company looking at the long-term opportunities and making a sizeable investment to position themselves for the recovery in 2010 and beyond.
The St Joseph plant is regarded as the single largest facility of its type in the US with a bluing capacity of around 50,000 hides per week. However, in recent months due to the downturn in market conditions, this plant has been running at considerably lower levels. National Beef Leather now joins Tyson and Swift in being a major packer player in the wet blue business.
The US wet blue business has been growing these past ten years and according to the USDA export sales report in 2008, over 6 million wet blue hides were sold for export. A large part of this business was targeted to the automotive and upholstery sector and with the substantial downturn in demand, all current producers are looking at the shoe and leathergoods segments for orders.
Cows hit by downturn
The hide market this last week has been under a great deal of pressure. Several sources place the market at about $38 for HTS, and BS in the range of $34 to $36. One report has BS offered at $35 into China with no takers. The story on cows is much worse as they are more closely linked with furniture and the auto business. There are reports that US processors are paying very little for certain cow sources. With recent reported trades in the Jacobsen Price Guide of $7.50 for branded cows, there is not much room for inbound freight and processing cost. One trader in China indicates that bids on cows are down $2 to $3.
Splits continue to be in short supply given the state of automotive and upholstery business. Prices for good quality heavy whole hides range between $0.42 and $0.43 per pound with medium weights around $0.03 under. Poorer-quality splits are up to a dime under these prices.
Adding to the constant stream of dismal economic news reports from Washington, US first-time jobless claims rose to 667,000 for the week ending February 21. Over 5.1 million workers continued on unemployment for the week ending February 14, the highest number since the labour department began keeping records in 1967.
Last week’s USDA sales and export figures were released with combined hides and wet blue sales totaling 661,000, and exports totaling 492,400. Sales exceeded the same week’s slaughter of 615,000 by 46,700 and exports fell short of slaughter close to 122,000 pieces. While the bulls may take solace in a good sales week, the weary bears are concerned that exports are falling behind and contributing to climbing inventories.
Now we know we can blame it on the cows.
Heavier cattle, heavier hides
January’s livestock slaughter numbers reflected a 6% decline in equivalent hide numbers compared to the previous year. It was also interesting to note that the average live weight was up 1%, reflecting heavier cattle and potentially heavier hides. The general industry consensus is for slaughter numbers to be lower in 2009 by around 1 million head. Under more normal circumstances this data would be sufficient reason to support firm producer pricing and justify a seller-type market; however, in reality this is not the case. The US hide business has changed and it is beginning to appear that these changes are not temporary.
Historically, tanners have always been global players searching for adequate supplies of suitable hides required for specific leather constructions. Europe and the old eastern bloc countries were active leather producers, feeding domestic and export industries across various industry segments. The US in the 1960s and 1970s also imported hides and leather from both South America and Europe. Today the leather business is in Asia with the centre, and therefore the heart beating, in China. This country is also the largest producer of footwear and other leathergoods. We should also not forget that China is the single largest owner of US debt, which in December 2008 was $700 billion.
Based on the latest revised numbers reported by the USDA, global hide supply has grown about 4% over the past ten years with today nearly 250 million hides being produced annually. These hides have been shipped to a multitude of destinations but, overwhelmingly, China has become the number-one destination.
From 1997 to 2007 Brazilian hide supply alone grew 38%. Production in the US actually declined during this timeframe by 11%. From a demand perspective, 2002 through 2007 leather was a hot commodity. As the demand for houses and cars expanded around the globe, producers increased capacities and went on an aggressive worldwide search for hide supply. Hide markets in every producing country and region responded accordingly with increased prices. The basic economic laws of supply versus demand took over and for the past five years we were living in a strong bull market. The sub-prime and housing crisis changed the game.
Automotive and residential upholstery have now fallen at least 30%, this translates to an annual demand reduction of around nine million hides. Sales for handbag and leathergoods, all discretionary spending items, have also declined. The bottom line is that we are dealing with a global net surplus of hides which we estimate to be around 10 million or 4%. Supply versus demand rules have now taken over and we are now living in a bearish market operating at price levels not seen for over 30 years.
… Just when you thought it was safe to go back in the water.
‘Fair of America’ only fair?
Last week, ‘The Fair of America’ or Anpic was held in León, Mexico. This was the thirtieth year of this trade fair, which typically presents materials and components as well as the latest technology for the footwear and leather industries.
Over the years, this was regarded as the first stop on the annual leather fair calendar, the next location being Hong Kong. In the past, this event showcased the Mexican tanning industry, which is centered in Leon and it was customary to attend various industry functions, specifically barbeques and bull fights. This year, the standard ancillary happenings were missing—no doubt a reflection of the current malaise in the global leather industry.
Considering the current economic challenges around the globe, it was no surprise that attendance—at least amongst the hide and leather participants—was low. Few US or overseas suppliers or buyers journeyed to the show. The tanners, traders, and dealers were outnumbered by the various Mariachi bands lined up at the famous intersection looking for an audience. It was also noted that some of the major local tanners were not exhibiting this year, although this was offset with the presence of several small-and medium-sized tanners who sensed an opportunity to fill the void.
The general atmosphere was that maybe this type of forum is no longer attractive to leather buyers and therefore was also not encouraging selling agents from different companies. Some comments heard were that the presence of some of the “big guys” was mainly to negotiate outstanding payments or revitalise pending contracts or perhaps just to see if business can be found.
Leather fashion appears polarised, although we did see patent leather on display and talk of greater interest; napa and nubuck constructions remain attractive and were featured in several collections mainly on men’s shoes. With sandals now being in production, it is not surprising that local tanneries are not enthusiastic to buy hides.
Saving grace
Wet blue and wet white convertors were not optimistic about their business—an obvious reflection of the downturn in the automotive sector. This leather segment has made Mexico the largest producer of automotive leather in the world, with Bader, Eagle Ottawa, GST, and Seton all having facilities in León. At its peak, automotive leather production in Mexico was estimated at more than 30,000 hides per day and with the decline in new vehicle sales, this number is now regarded as less than 5,000 per day. With the peso now hovering around 15 to $1 compared to last year’s rate average of around10, doing business in Mexico is 50% cheaper and confirms the strategies of the various auto companies. With the absence of volume and the burden of overcapacity, this is the only saving grace in these very difficult and challenging times.
Next stop Hong Kong.
Inventory intrigue
The inventory situation is unquestionably the major stumbling block for the hide market to fully find a bottom.
This all started back last year in September and October for cow hides, and in October and November for steer hides. Simply, as the price of hides dropped lower each week, demand also slowed to the point where hide producers were unable to sell anywhere close to their production numbers. Both cow and fed steer and heifer packers continued to kill big, and with more hides coming in than going out, the inventories grew. The scramble in November and December was to find locations to store hides. Thus, while we can see some improvement in hide sales these past few weeks, it is unlikely that any of the producers that stored hides were able to reduce much of their inventories.
There were some reports recently that gave a glimmer of hope to the hide industry, and these related to potential new orders for leather. Evidently, some of the major brands such as Nike, Reebok, Timberland and so on have indicated that fall shoe orders may be showing some improvement and they are looking for quotes on leather. If this does, in fact, translate into leather orders, then perhaps tanners may be looking to buy some hides in volume in the near future. Some could say this is ‘pie-in-the-sky’ thinking, but at this point, many in the US hide industry are grasping for anything positive. Pie in the sky may not be pie on our plates yet, but just thinking of pie at least makes people feel better.
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