Leather Pipeline - 15.12.15
16/12/2015
The financial markets have been fairly quiet over the past fortnight. Much of the attention was on the COP21 climate conference in Paris, where an agreement was reached to keep the global average temperature to a rise "well below" 2C.
The world is waiting for the interest rates rise in the US and observers expect the quantitative easing program in the eurozone to remain and interest rates to stay low.
The outlook for the global economy is not too positive. The situation in China remains unclear as official data is not always reliable. Many business people see the manufacturing sector shrinking faster than the service sector expanding.
The winter smog in Northern China has led to the closure of many factories, including tanneries, that were deemed to be polluting the air. Apart from the loss of production, more worrying was the fact there have been few complaints. Very little has been heard about the ‘special nightshifts’ that have been talked of in the past – this indicates there are no extended order books. The exchange rate for the renminbi is also not helping in the import and production sector in China.
Many consider the commodity price sector as a reliable indicator for the global economy. Looking at the main industrial commodities, one has to be worried. The oil price continued to fall and at the end of last week broke the $40/barrel mark. Blaming Saudi Arabia’s strategy to drive oil prices lower to eliminate competition from fracking operators in the US is too simple. Demand is down and supply abundant. The markets tend to exaggerate as much on the downside as they do on the upside and so one has to be ready for further surprises in 2016.
Prices for other industrial raw materials such as metals are also not doing much better, which does not instill much confidence about industrial production for the first half of 2016. Most public enterprises are reasonably quiet about their forecasts for the next year.
Market intelligence
This year is now winding down quickly. There are only three weeks left and next week will be the last in terms of regular production. The following two or even three in Europe, businesses will either be closed or running in slow gear. When the Western world restarts in the New Year, the Chinese New Year holidays begin.
In November a good number of tanners stated that they were planning to keep production running during the holidays. However, one by one they have declared they will take their regular two weeks off and only some of the contract tanners will remain open to absorb some of the fresh hide programmes that need to be maintained. That is not an indication of full order books.
We are hearing the same from Asia. Under normal circumstances, production is stopped for about two weeks, or even 10 days if order books are full. In the past weeks a number of tanners have announced that they might close for longer periods, up to four weeks. Again, this is not an indication of solid orders.
Overview
This is the point at which we have to take a seat a bit higher up in the audience to have a full view over the pitch and to check the tactics of the teams for the second half of the season.
Team A, the beef industry and hide packers, following a pretty defensive first half, have decided to change tack and get back on the field with a much more offensive tactic to regain control.
Team B, tanners, have no reason to chance anything during half time, because their clear play structure, individual strength and offensive ideas have proved successful and have allowed them to take the lead so far. However, it was a very ambitious, physically demanding and risky tactic which has exhausted the team more than expected.
By the end of first half, Team B needs the break more than Team A and we will see whether the holiday period is enough to recharge their batteries.
What does this mean? Since spring (the first half), the buyers have been able to force the raw material industry to finally listen and lower prices. Before that, prices had not been justified by leather demand or leather prices.
So, raw material inventories were run down, purchasing decisions were delayed and sellers were forced to reduce prices substantially to clear their warehouses.
Due to the falling demand for leather, buyers were able to stay out of the market much longer than the sellers expected. The currency market and the difference between various leather segments made this trend less pronounced for various articles and origins of the hides.
Tanners had too many low grades, too few orders and low returns, but they had to keep the beamhouses running and the tanning and finishing plants supplied and so had to replenish inventory. This is what happened in November and sellers, getting hides sold and shipped, saw their chance to protect their position again.
In particular, in the US, we see the same pattern as we did a year ago, with the only difference that the prices in the Americas are now better adjusted and in line with the global price structure.
When we look at the export sales numbers from the US, one has to recognise that sales began to inflate when sellers recorded their prices ideas, but the prices agreed on to move inventory were far lower than those made public.
The difference of prices between now (asked) and several weeks ago (done) is not the few USD listed, but in many cases double-digit numbers. With the sellers now insisting on their asking levels, sales have dwindled.
In short, prices concluded in early November are the ones the industry could digest but the ones asked today don’t reflect the reality of the leather market.
The seller puts the price tag on the product and waits. If only one customer buys one hide the price is confirmed and becomes the reference of the price graph of the day. As the real values and volumes are not in the reports, it leaves the market open to interpretation.
As a reminder, contracts that looked so brilliant in spring and were the basis of the market balance did not materialised and so needed a complete re-evaluation in summer.
Leather demand
We are still not seeing any improvement in the sales of shoe leather. The price of oil is continuing to fall, and we are hearing from many shoe factories that have reduced or will reduce their leather content. There is no demand for low quality raw materials and even premium raw materials such as calf have lost 30% to 50% of their value in a year.
The sanctions against Russia and the warm winter in the Northern hemisphere are also adding to leather’s woes and it is hard to justify a price premium for the finished product. We should be happy that all of this hasn’t reached the automotive industry and its buyers. This is the only sector that is still expanding and where leather can still defend its premium position.
So, we still believe that the November bonanza was a normal market reaction, but it has not changed the fundamentals. We don’t care about the short-term price fluctuations but we have to remain prudent for the first half of 2016 and are waiting for the time when lower leather prices, fashion or a change in the price trend of alternatives will give leather a favourable position again.
Splits and skins
The split market remains difficult. Some sales have been agreed for select items, but prices are low. Standard wet blue splits are not finding buyers and it is no longer a question of price. Suede is faring a little better.
Chinese buyers are sniffing around the skins markets in Europe because they like the larger winter skins, but a real round of buying hasn’t taken place, and this makes it difficult to estimate the market levels. The winter weather is helping somewhat, but prices are so low that they are not even a factor.
For the next two weeks, all eyes will be on Asia as the rest of the world will be finished for the year. It is unlikely that we will see major market movements.
Hopefully there will be some positive news from fashion and leathergoods during the Christmas retail period.
It is time for to wish our readers a very happy Christmas. After a year that has been challenging for the leather pipeline, rest and relaxation will be well deserved. There might also be some time to think about preparing for the challenges of 2016. Happy holidays!
Share this story:
