German Perspective - 7.7.15
What happened this week: We have now entered the classic market conditions one can expect when a market drops to the extent we have seen over the past 10 to 12 weeks – a situation everybody has been trying to avoid for a long time.
It is not too long ago that any concern about leather demand and the level of raw material prices was met with a mild smile and compassion.
This trade never really learns and there are a number of people around who should remember. The biggest error is listening to the stories that rising global population and wealth justifies higher demand and prices for leather. It is extremely difficult to understand how people can come to this conclusion when all facts are considered.
A product like leather is never easy, because the prices correlate with the levels of the substitutes rather than the simple assumption that population and wealth have a higher correlation than price.
If one looks at the price levels of cotton versus oil-related fibres nobody can really be surprised about what has happened in the leather industry and the hide market recently.
The main problem is not so much if something happens but, rather, when. Even if the alternative products do not hold much interest, there have been warnings from the skin and split market since mid-2014.
Those players who were not willing to look at supply and demand or the substitutes, should have at least been worried about the capacity reduction in China. Leather production (capacity) is way down because of the government’s pollution controls and tannery shutdowns.
The main problem is how to find a new and workable level. There is no question that the massive price correction we have seen is making tanners with regular order books profitable again, but it does not resolve the problem for those with expensive stocks or insufficient order books. The market is congested and it will take some time until the excess of raw material is absorbed and digested by the market. The main problem is that it's difficult to get a clear picture about how much material is congested.
In Europe, tanneries are not overstocked, because fresh hide supplies and hand-to-mouth buying have meant they have avoided excessive inventory.
This might be different in other parts of the world, mainly in Asia, but it seems even there, not everyone has big stocks. Generally, it seems that the big players on the supply side have the biggest headaches while the smaller ones have played their cards much better recently. The big question mark is over the amount of semi-finished material.
There is very little to report about trading this week as sales remained rather coincidental and we couldn't find any serious interest or price levels, with the exception of heavy, high-quality bullhides which are the only ones still moving.
The kill: The higher the temperatures, the lower the kill. Beef sales are pretty bad and cold stores are full. Weights are low, it is summer and nothing will change in the coming weeks.
What we expect: It would be best to shut down and find a nice place to relax and to enjoy the summer. Unfortunately, this trade doesn't allow this and so we have to deal with the realities. It seems that it will take some time to sort the confusion out. Spreads are too wide, serious information too little and the season is not really helping either. So, let’s just lean back and wait until the avalanche rolls out.
