Market Intelligence

While the financial markets are keeping us busy, the same cannot be said about the leather pipeline. It will eventually be influenced by the markets, but the hide and skin markets have already anticipated what might happen. Hide and skin prices have always been a pretty reliable indicator for what is going to happen in the economy.

However, we accept the crash in the raw material markets for the leather industry has this time been for different reasons. The structural reasons have been far stronger and the beef industry and its attempt to influence raw material price is playing a far bigger role than the markets.

We have already discussed this a number of times, so we can now deal with some different issues. Everybody in the trade continues to discuss how much a contract in the hide and skin business is actually worth. Other commodity traders they are shaking their heads that this particular trade gets away with non-performance of official contracts.

Suppliers are complaining that tanners and customers in China are either not accepting, renegotiating or not paying for contracts they signed a few weeks or months ago.

However, we cannot simply blame one side of the contract table. We are spending a lot of time speaking with suppliers as well as customers. Generally, one can say that the trade is divided into a number of relationships. The first one very few talk about. It is the relationship based on respect and mutual dependence. On one side, the customer (tanner) is regularly taking product because he has a stable leather production and is consequently depending on the supplier to provide a stable quality with reliable shipments. The key here is consistency.

When you ask people they all claim this is what their aim is and what they are doing. However, it is only true for a certain percentage of raw material suppliers and leather producers. It must be quite a number, because talking to a lot of people you still find many are dealing with declining demand, falling prices, uncertainty about the leather business and profitability, but they do not complain about the relationship with their supplier or customer. This section is the heart of the business and the bread-and-butter part of it.

This leads us to another type of relationships. On the supplier side there are still a lot of players that take advantage of a firmer market: playing with qualities, mixing cocktails, cheating with weights and even claiming for force majeure when local raw material markets are trending higher and erasing profit margins.

Buyers are failing to sanction this because they have very little option, because they have to pay before the goods arrive and in a firm market there is some money to be made. However, they notice, and may even inform the supplier, but district follow-up is barely heard of. Having it in the register, however, means when the market goes down they still have an account that needs to be settled and there will be requests for renegotiations or non-acceptance of outstanding contracts.

Many suppliers will claim that this is not true and they have always performed perfectly. This may or may not be true, but one should look at the quality of the customer. Many suppliers never really check what their customers are doing, what kind of added value they are generating and if they are a real industrial producer or just an operation trying to take short-term advantage of market fluctuations, or a service trader acting on behalf of a third party.

We don’t want to get too much into detail, because everybody has their own story. The fact remains that there are good ones and bad ones on both sides and the bad ones are causing a lot of damage to the trade. They do not just hurt the suppliers or customers, but they make their competitors look like fools when they behave correctly. With all the problems we have and which are comparable to the situation in 2008, many are calling again for tougher controls of the trading rules. They point to other commodity trades where nobody would even dare to not perform. So, what can be done?

ESTABLISHING AN EXCHANGE
Several people are now asking for help from their associations, think back to the good old days of arbitration, or even calling for court cases against non-performers. However, in China, some companies are closing and reopening under another name to hide bad reputation. On the supply side, such activity is not as widespread but similar attitudes are apparent in various places.

From our point of view, the associations cannot help, and court cases cannot educate an entire trade. We don’t claim to have the solution, but if producers and raw material buyers understand that morals are as important as they are for the sellers then there might be a chance to create a trading platform or a mercantile exchange, which is only allowed to operate with membership.

The membership has to be paid for, there will be a board to observe and to regulate the trade and anyone who fails will lose membership. We know there are many arguments for and against but only an internationally regulated forum where buyers and sellers are known, the trades are registered and members have to provide certain security deposits in relation to their intended trading volume can really offer the necessary tools to control performance.

This might not be necessary for domestic and local trades but for intercontinental operations it would definitely assist in defending against the ever repeating wrongdoings of a lot of market participants.

The biggest problem however would be getting a sufficient number of international suppliers and customers to set up such an operation. However, if the leading associations from the US, South America, Australia, New Zealand, Europe and parts of Africa as suppliers and the main tanners’ associations from Asia could agree to set something up, it would definitely be a start. We already have the Leather Working Group where certain audits apply, so why shouldn’t something on the commercial side be possible?

SPLIT AND SKIN MARKET
The split market is as dead as it has been for a long time. In the meantime, collagen and gelatine splits in Europe are also dropping. The tanning industry in Europe is closing until the end of August and everybody is departing with the hope that things may change for the better after the summer holidays. However, it is very difficult to find any light at the end of the tunnel. As far as collagen and gelatine is concerned, we are not entirely negative and there might be a surplus in the market, but generally this is a sector where for some reason one must not be afraid of a major decline of consumption.

The skin market is pretty much a mirror of the split market. There is a massive surplus of unsold material in warehouses around the globe and one can find few indications of rising interest for sheepskin nappa leathers. However, prices have come down by so much that there are rumours of certain players sniffing around to make sure they don’t miss the boat. Skins will not get much cheaper than this and experienced tanners are aware that if finance allows, they should take advantage of the situation and buy some raw material even if it’s not covered by any finished leather contracts.

We are now in mid-July. In Europe, people are beginning to discuss raw material supplies for their reopening after the summer holidays. They are slow, because nobody wants to be too early and to pay too much. However, prices in Europe are not attractive anymore and there are many other origins that are cheaper, so experienced pundits see a pretty good chance that European raw material prices will have to adjust substantially get in line with international levels.

European suppliers hope that before the end of August, Asian customers will have to replenish, but they might be disappointed because there are better options in other regions. The situation is difficult because there is no market. In international terms we might be trading less than 50% of the raw material produced. Even if the official statistics speak a different language we believe a lot of the sales reported are actually resales of product that has been registered once or twice before. Consequently, the trading volume is so low that a realistic match between supply and demand cannot be found.

The landslide we have seen since the Hong Kong fair (APLF in March) still has to roll out. There might be some rebounds but at this stage we have to accept that the fundamentals of the market are not yet showing any sufficient change to believe we have a solid base. It is difficult to say what is required from the leather manufacturers to rebuild the necessary market confidence.

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