The Leather Pipeline - 27.05.14
27/05/2014
The world continues to deal more with political issues and tensions than with the standard data: the Ukraine crisis, riots in Vietnam, Boko Haram blasting innocent people in Nigeria, the military taking over in Thailand and EU elections, just to name some of the issues that are presently making the headlines. For many of us this might be far away, but the world is no longer as stable as it was. The FIFA World Cup in Brazil is throwing its shadows ahead and if football can reign for a month, it might be a major tranquilliser.
In the big economies, the institutions continue to watch growth carefully. While in Europe many see the recovery after the 2008 crisis to be intact, the Chinese are seeing their economy as stable as far as official growth is concerned, but vulnerable if you look at the property market, for example. In the US things are just about stable, while in Japan a flurry of consumption in the first quarter (before sales taxes went up) is fading. In general, the Northern hemisphere is beginning to prepare for the summer when outdoor activity and holidays are more important than shopping.
Since the banks are all dealing with the issue of market manipulation, the commodity and currency markets have become very quiet and trading ranges have been very, very narrow for some time.
Oil, gold and other industrial metals are hardly moving at all with very few exceptions.
In Europe, the discussion about the strength of the euro continues. Many expect the European Central Bank to lower interest rates to 0% at the beginning of June to push banks towards more and easier lending. The euro has indeed lost some value already and is trading about 2% lower than at the peaks, close to the $1.40, seen a few weeks ago. The EU recovery seems to be intact in some countries, and even in Greece and Spain the trend is better, but France and Italy are still lagging behind. The Ukraine crisis is also weighing on the business sentiment shown by recent polls in Germany where the sentiment dropped more than analysts expected. However, the market forces are still not totally clear if it is wise to take already serious short positions on the European currency and the summer should become pretty interesting as it seems that the big hands are beginning to sort their positions out.
Market Intelligence
The raw material market is still trying to sort itself out; it has been a long, long time, as far as we can remember, since we had such massive confusion and disorientation.
The problems in northern China have now been added to by turmoil in Vietnam, where a conflict about the exploration rights of offshore resources (oil) has actually reached the streets and demonstrated a fundamental social problem between the two nations. It has gone so far that Chinese factories and citizens were being hunted and the Chinese government had to send ships to evacuate some of their fellow citizens in Vietnam to protect their lives and safety. This has caused suspensions to production at many factories, and this includes tanneries and shoe factories, as well as transport from and to China.
Although the Vietnamese government is calling for order and trying to play the situation down, it remains unresolved and demonstrates underlying sentiments against the Chinese business invasion and the hegemonic position in the region and this is not only a problem in Vietnam. Everyone is convinced that the problem is only temporary and production will soon resume, but it needs little these days to endanger the fragile balance in the market and so this has added to the concerns some people have about the market in general.
This is going to be one of the shorter versions of the Market Intelligence. We raised a list of questions in our last issue and many on them remain unanswered. It doesn’t come as a surprise that big packer groups are trying to do everything to get rid of the negative tone of the market and to stabilise prices as soon as they can. They are aggressively advertising that they don’t have any problems, that demand is good enough to ask for slightly higher prices and they garnish this with the low kill we see in many parts of the world at this moment. They fear contamination from market to market, which could create a downward spiral jumping from country to country.
Others say this is like trying to hold back an avalanche with a spoon, and instead are simply trying to book as much business as they can with the best customers they can find for the quickest shipments possible to make sure that they are not caught by a downward trend that they expect to last for some time. They see a massive delay in shipments due to the problems in Hebei province in China, the rising cost of production, the falling price of splits, bellies and shoulders, the low levels of much sheepskin-related raw material and the low season for leather production. They claim to know about a great number of hides still sitting in warehouses, awaiting buyers. They feel that this is enough to predict a downward trend that will last longer than just a few more weeks.
We tend to believe that the supply shortage story as a consequence of lower kills can only be justified for a handful of articles. It is certainly true that the supply of speciality raw materials like the magic, high-quality, heavy hides for automotive leather production, as well as some top-quality and speciality calfskins. These are just about meeting regular requirements and could face short-term shortages, but it is also true that many tanners have actively looked for alternative articles and in one or two cases they have been successful. Consequently, one must be sceptical about hopes that high levels of need could force the industry to take the foot off the brakes.
During the past two weeks, a high volume of sales in particular of EU cows was reported. Prices are certainly at $8-$10 below the peak levels seen around the time of the APLF fair at the start of April, but volumes are still pretty impressive and both sides of the table have been speculating whether these were re-sales or new business. It doesn’t take much to guess who was taking which opinion. No matter, sellers were pressing pretty hard for immediate letters-of-credit openings. It’s true that one also had the impression that several clients had found excuses for walking away from their expensive contracts, while at the same time using different names and import agents to buy hides again at new and reduced levels. Consequently, it is going to be interesting to see now what the real position of the physical supply and demand of cowhides is.
Premium suppliers are being rewarded for their standards and reliability under all market conditions. Many tanners have realised what happens in a rising market and by how much certain suppliers will bend the standards. It’s nothing new and we have discussed this many times already, but there is always the day when the Empire strikes back and we are hearing from a number of quality leather producers that they are now actively picking out suppliers they don’t need, suppliers they consider have been guilty of not delivering what the tanners paid for.
Weak or difficult market conditions always support reliable suppliers. They deserve it and we would actually favour even more buyer discipline in difficult times, even when people are desperate. A lot of market problems are still related to the options the raw material suppliers offer when the drums need to be filled.
Well the above may show that we are still in a period of transition, but it is pretty obvious that we are not in a period of shortage anymore. It explains also that there are still very influential players on the supply side who have the strength to defend positions against the general trends in the business.
The split market is in correction mode too, although here it is not correct to generalise. Lime splits in China are falling week by week and we have been discussing the reasons. This is related to problems in the gelatine industry and the shut-down of some cheap tanning capacities. The overshooting prices for wet blue splits are correcting too, and we understand that very few of the top-price contracts are being honoured; many of them are officially cancelled. This is scaring quite a few tanners now because they made their calculations on the basis of compensation from the split prices achieved a few weeks ago and now nothing fits any more. It is not clear if there is a safe shore ahead.
In contrast to the cow market, we are not hearing about active trading and reselling of product with splits. Quite the reverse: people are still uncertain about contracts and when they are going to be honoured. This not only a problem for current production, but makes the calculation of the future also pretty vague. We have to admit that we find this pretty weird because the information we are getting is not too negative as far as split consumption is concerned in the next leather season. However, if the split market doesn’t find a bottom soon, we will have to be more concerned about the hide market too.
The skins market is as uncertain as the rest. Again it is northern China that is creating the uncertainty. The nappa market is in stalemate. Even the end of the season in the southern hemisphere cannot attract buyers for the stocks around Europe. It really needs a push from fashion to move things forward again, because prices can’t be the obstacle now. The season for new lambs is just beginning with the first sales already reported. As usual, buyers are pretty cautious and everyone wants prices to hit the bottom, but in the end you can only buy the skins once in a season, so you have to decide if you are in or out. The first few sales are at levels that cannot cause too much harm to anyone. They are on the low side of the long-term trading range and tanners cannot really complain without being greedy.
The coming weeks might still see some disorder. People on both sides of the negotiating table are trying to get the upper hand in the market. The leather business is not uniform at the moment and this means we could even see controversial trends, making it even more difficult to find a common base. Sellers might be able to force buyers to pay the asking price for favoured articles, but we doubt whether articles of ordinary quality have reached bottom yet, and this might cause new tensions. Also the cash-flow situation has to be watched, with all the expensive hides now in the tanneries and the low sales season ahead.
In short we think that prices for the better-quality material have a fair chance of defending themselves, but the pressure on medium- and lower-quality raw material will certainly persist and sellers cannot expect much mercy from the market.
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