The Leather Pipeline - 24.02.15
24/02/2015
Macroeconomics
In the past two weeks the world has been in the tight grip of political issues once more. The situation in the Ukraine is not improving at all and whatever negotiations are made and agreements concluded they are broken almost as soon as they have been signed.
It is pretty obvious that Russia is not going to make any concessions and all intentions are to get the eastern part of the Ukraine under its control. To protect the integrity of the Ukraine has seemed in the past two weeks as though it will not be possible, except perhaps by taking the option to go to war. Is war really a viable option? No, as it has never been and Mr Putin is fully aware of the situation. Although the general fundamentals of global politics have changed one has to remember the old days of the Cold War.
For the normal people in the streets in the western world it seems that they are not really too worried about the risk and the potential consequences of this conflict and let’s hope, that they are right in their relaxed position. Far more are impressed by physical attacks such as the recent shootings in Copenhagen. The public is beginning to realise that the threat is not only from organised groups; threats from individuals are also there.
The other and important issue remains the situation between Greece and the rest of Europe. The new government in Athens is trying to play hard, making agreement with the rest of the euro zone extremely difficult. It’s obvious that Greece cannot find an immediate way out, but it’s equally obvious that the government is not willing to respect agreements or willing to have a professional master plan that will convince other EU members that a strategy is in place to put an end to budget deficits and to turn the economy around again. One can be for or against the political positions, but a serious vision as to how the problems of Greece can be solved it still missing.
For the financial markets the situation was pretty much a ‘wait and see’ scenario. Currencies and stock markets have traded in pretty narrow ranges in the past two weeks. Only the oil price saw a major movement, rebounding strongly. Although the gain was about 15 % from the lows, we are still at about half the price of what it was six months ago.
A bit surprising is the continuous slide of the price of gold and other precious metals. Normally bought in times of crisis, bullion at the moment is not really a fashionable investment. It’s possible that investors are more interested in deals and consequently stocks and other yielding assets than in security.
Market Intelligence
The last two weeks have been quiet, with hardly anything emerging as a market mover. The Lunar New Year holidays in Asia have come to have the same intense impact on global economic activity as the Christmas period or the summer holiday season. Consequently, there was very little activity and businesses in Asia were really only winding down for the break.
Political crises, which used to have a strong impact on business and the economy, are losing their ability to influence markets. It is surprising how little companies and economists are talking about the potential influence of the crisis in the Ukraine or of problems in the Middle East. The world hasn’t been as unstable for a long time as it is at the beginning of 2015.
However, it is also true that it makes absolutely no sense to panic or to dig yourself into a hole when you have hardly any chance of having any influence on the situation. It might indeed be best if people just continue with business as usual and just follow their day-to-day lives. However, those still living in relative peace should not forget about those who are seriously suffering from war and violence.
The leather pipeline took little notice of the problems around the globe. The biggest matter of concern and discussion was the strike at west coast ports in the US. Many pundits are scratching their heads and are trying to figure out what this reduction of physical movement of material in and out of the US will have meant for the leather pipeline in total.
Common sense suggests that with the congestion lasting for such a long time, shipping lines must begin to reroute their vessels instead of having them wait for the end of the dispute. At the moment most shipping companies are talking about an approximate 10-day delay, but speaking to people close to the issue, they are of the opinion that it will take a much longer period of time until everything is straightened out and normal schedules can begin again, even with a new agreement coming into force on February 21.
While US exporters are focusing very much on the effects of the congestion on their shipments, you also have to be aware that the import of finished product has been affected in the same way. A lot of products will not reach the shelves on time, which could have a serious impact on the production cycle for the coming seasons as well.
As far as the supply side and raw material are concerned, not only have hides for the leather industry been stuck, but beef exports have suffered too. This means fewer hides have been shipped, and also that fewer hides have been produced over these weeks as slaughter numbers in the US, for various reasons, have been hitting record lows for this time of the year.
For the leather pipeline there is a need to analyse the real impact of the product flow from the US. Consequently it would be very valuable to know the quantity of hides caught up in the congestion since the middle of January. This information is pretty difficult to obtain because official statistics do not really deliver the right information and it is almost impossible to extract from the official data the real number of hides en route, the ones waiting in containers and the numbers still in shippers’ warehouses. There is a lot of guessing and opinions, but one can also feel that the information published is influenced by the market interests of the individual talking.
It is fair to mention that even after almost a month of problems and delayed shipments the leather industry has not begun to panic. Other supply origins were quite happy to fill the gaps. Generally reduced demand for leather and raw material made tanners reasonably relaxed about the supply issue. However, the shift of demand towards Europe, for example, has possibly created a better feel in the old world about the market than might be really justified. The demand came obviously at the right time. Heavy kills all over Europe from October to January had created abundant supply and with the Christmas break in Europe even a decent surplus of salted stocks. The sharp fall in the value of the euro made EU hides suddenly an attractive option, even without the shipping problems from the US. Some tanners in Asia who are trying to upgrade leather quality had begun by the second half of January to show a stable and decent interest in European stocks, which could have become a burden without the Asian export opportunities, at least for the medium and heavyweight males.
More and more people wonder how much they can trust the figures that are published these days. In particular prices, sales and export numbers from the US continue to raise eyebrows. From November to January the price levels reported in relation what other markets had to offer seemed questionable. Now it is rather the number of export shipments that do not correlate to the problems at the west-coast ports. Either there is an issue in the reporting and data collection, or hide exports have barely been touched by the problems, which is hard to believe.
Not that it really changes anything in the end, but it would be significantly better if clarity and confidence could be regained, but this would require better explanations of how the numbers are generated and what the conditions and rules are for reporting them.
We have to deal with what we have and this means that we do not have too many options. Either the numbers are correct and reflect the reality than the market has bottomed out and, in combination with the reduced kill, supply and demand are in balance, or the numbers are inflated and the hides congested, which means that hides have piled up and, when the blockage is removed, they will spill with great pressure into the supply chain. What speaks against a shortage of supply is the abundant offer from various other origins such as South America.
This leads us to another aspect of the present market. No matter whom you speak to in the leather industry everyone is complaining about substantial problems with prices. Those who are still supplying old leather contracts are burdened by lower split returns and all others who have had to negotiate new leather contracts recently are facing substantial headwinds with leather prices. This is getting worse the further down the price scale you go. Even in the automotive sector, which has the fewest problems with orders and quantity problems, price is an issue and more and more experiments with lower qualities and substitutions are being made wherever possible.
As a consequence tanners are continuing to evaluate all raw material options in an attempt to meet customers requests with regard to price and quality and in the hope that a successful solution will bring the order volumes many are so desperately waiting for. This is even more important when we consider that, at least in Europe, we are quickly approaching the end of the busy season.
The split market continues to remain under pressure with the exception of specialties like extra heavy and high-substance splits or top-quality suedes. For the rest the price problems have returned, although the extent of the problem is less than it was last year.
The skins market has been a bit shaken in Europe. Strong market activity by the largest Chinese player in the UK market pushed abattoir prices higher and created hopes for a better trend in the lamb and sheepskin market. Enthusiasm faded quickly in the end and prices were not really able to gain any further momentum on the main markets. The Chinese New Year holidays may also have been a factor. The problems in trade with Russia and the strong devaluation of the ruble have stopped almost all production in Turkey and there is not much sign of a recovery in sight. The weeks after the Chinese New Year will be decisive. At least in Europe, skins from the late winter season are traditionally the largest and the ones with most of wool on them. The only skins that are seeing a good performance are merino types, which have gained some momentum and recovered pretty well in price. The Easter slaughter in just six weeks from now will bring another decent volume of skins to the market and it will be interesting to see how this is going to be absorbed.
The coming weeks will be determined by the return of the Asians from their holidays and by the Lineapelle exhibition in Milan. In just another month we are expecting the APLF exhibition in Hong Kong and this should help us put together a clearer picture of the leather business for the rest of 2015 and of the major trends as far as price and quantity are concerned. As far as the price trends are concerned we think that the gap between the main articles is still too wide. Several hide types are comparatively cheap while others, in particular in USD terms, still look too expensive. This gap needs to be closed and the coming weeks will show if this means cheap hides becoming more expensive or expensive hides becoming cheaper or, the most likely scenario, both.
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