The market continues to search for a clear direction. In the past two weeks there were the first attempts of the packing industry, in particular from the Americas, to stop the descent of prices and to turn the situation around.

However, even using all the tricks and stories, all the smoke and threats, the efforts were in vain. It might be fair for most of the standard origins and products to call the market steady, but in the end, what is today’s market? Is it the standard items which are preferred by the industrial manufacturers, do we talk about the privileged high-quality and specialty items, or is it the raw material for general leather production?

As usual, and as many times seen in the past, everybody is picking whatever suits them best. With the big packer and global protein companies dominating the media, they take their business as a reference for the entire situation.

This might be a bit short-sighted, because as much as big suppliers and manufacturers depend on each other, the vast majority of the tanning industry is medium and small-sized and fighting every day for the right decision, the right customer or the right supplier with the right product.

At this stage we might consider countries which are officially not allowed to export to China. A huge percentage of these products have found legal or illegal ways into the tanning industry in the mainland and have also supplied the tanning drums in Hebei province.

There are drop splits or other splits produced in China whose prices have been pushed so high and are simply unable to find the manufacturing capacity to be processed.

There is also a large volume of sheep and lambskins which need to be fellmongered which are missing the main manufacturing centre four hours’ drive south of Beijing.

In the end, they are all connected in the pipeline of leather manufacturing. Possibly not directly, maybe not with immediate effect, but sooner or later all the supply of raw material is becoming part of the big picture.

Many in the leather supply chain are scratching their heads as to where we stand in the long-term cycles of raw material price fluctuations, and in leather production it is very difficult to take decisions at this stage. It is always much easier to explain what has happened rather than to come to an opinion about the present and future. However, we dare to try.

From our perspective, we have to accept the hype we have seen in the past eight months had various justifications, but the major determining factor was the rise and fall of the tanning centres in China’s Hebei province.

The reason for the strong performance of raw material prices has been the automotive industry, which is the only sector of the leather business where solid growth was recorded. The other sectors were fighting against the price rises which they were not able to translate into leather prices. They turned to cheaper raw materials and this explains the split prices.

There has been a massive expansion of leather production in cheap production centres. The APLF in Shanghai last September could be called the sellers’ dream. With the relocation of a lot of contract tanning to Hebei, the tanners from that area realised how competitive they were, under the condition that they were not dealing with their wastewater and effluent in a proper way. Quickly, importers and finance was found with the potential to grab an increasingly large share of the leather business.

At the opening of the show, customers flooded the aisles and who could remember having sold so many hides to new customers on the first day of a trade show? This continued until mid-April this year. The established tanners in the coastal provinces of China faced serious competition.

Consequently, we saw inflated raw material demand and production, which was, in our opinion, never really covered by the equivalent demand for finished leather. For the general market, the reality had been camouflaged for a long time and possibly it would have lasted for quite a period if the Chinese government hadn’t stepped to close all these factories, maybe too many, to protect the environment.

What might have been a painful, slow restructuring has become sudden death by a government interference. After eight weeks, with tanneries closed and leather production stopped we should have, under normal circumstance, noticed a shortage in the pipeline, but there has been no indication that this is the case. This means that most of this capacity has never really been needed to supply the leather market and consequently inflated raw material demand and deflating selling prices for leather.

The main question at this stage is how close we are to the real balance between supply and demand, or between manufacturing capacity and demand. The closures in Hebei are not just taking the extra capacity out of the market and there are now many factors that will have to be watched when the shockwaves have finally dissipated.

Certainly, some of the production is trying to relocate, but this might just be those tanners that used the region as a cheap contract tanning base. These tanners will find new homes, and many of them already have done. Those tanners that made a living from turning the cheapest raw materials into the cheapest leather might be history. Others, which were trying to build a quality leather business on the basis of cheaper production costs, might have to stop, because it will be difficult to compete with the established industries and to restart in a new location.

For the moment however the fundamental balance between available raw material and operating tanning capacity as well as leather demand is disturbed and temporarily holding more raw material than is needed.

The split market remains in the doldrums. Prices for splits had simply gone too far and fundamentally we have a similar situation to the one in the general hide market. Certain good-quality materials suitable for medium and higher-end productions are still in good demand, but the general uncertainty and the price fall for many items are dragging split prices substantially lower. One shouldn’t complain too much, because even today’s prices are still reasonably high if one compares them with some time ago.

The skin market hasn’t offered any real changes in the past weeks. Prices all over are significantly lower, with only a few exceptions. European suppliers are suffering from the stocks they have to keep due to the collapse of business with fellmongeries and producers of nappa leather in China. The bits of business for decoration and double face is not enough to absorb the availability of raw material.

Most of the prices have now fallen so far that lower-price producers from countries like Pakistan, India and some speculators are sniffing around, trying to get the best bargains. The interesting question is how the demand for new-season lambs in Europe is going to continue and if, in particular, the Turkish tanning industry is hungry enough to take the skins that are produced over the next few months.

For the coming weeks we are sure the downward trend will continue. A number of the big shippers around the globe will continue to support the market and tanners might watch the price developments with a bit of fear, because further substantial declines could become a threat to their leather prices which they had pushed higher in the first quarter through so much pain and effort. However, everybody should recognise that hide prices are still very high in historical terms and even a correction of another 10% to 20% would just bring them back to average levels.

The good news is that sellers will not allow the market to collapse. Contrary to former times, the supply side is strong enough that they don’t have to liquidate inventories at whatever price.

So, everything points into a general slide of prices with suppliers pretending the market is better than it really is. The critical moment will be between July and the beginning of September when leather demand and the need of tanners will surface for the high season of leather production in the last quarter of the year.

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