German Perspective - 30.5.17
30/05/2017
Prices of hides peaked around the Asia Pacific Leather Fair in March 2016. These had decoupled from the reality of leather prices and, with the end of high production season in some sectors, demand declined, because tanners did not need to fill drums for leather orders at any price.
Over summer 2016 demand declined and it took until September before the suppliers understood what was happening and adjusted prices to secure a turnaround of the raw materials they needed to sell.
This year we are in the same situation, even though some parameters have changed. Leather as a material is in retreat for many reasons and the volume of consumption is declining. However, raw material supply has not declined. The biggest region of production (China) has tightened policies and many tanners have closed or reduced production. Less competition should have given the remaining industry the chance to strengthen their position and to increase leather prices, but this has not happened.
At the same time, the cost of chemicals, transportation labour, effluent treatment and waste management has risen. On the revenue side, the split return has declined with falling split prices in most cases.
Conditions haven’t improved for the leather industry in general, although the situation isn’t the same for everyone. Raw material prices increased from September 2016 until March 2017 and have since entered a period of correction. If these assumptions are correct, it is difficult to understand why the European beef industry continues to stem against the inevitable. The only result they achieve is a loss of market share in the global markets.
Competing origins have adjusted prices and the euro has gained more than 5% since April. One gets the impression that there will not be a well-managed price adjustment but rather a slump during or after the summer holidays.
It is not difficult to come to a fair market valuation of the various hide types and it is not difficult to realise that some grades have their own path, such as only locally available product with reduced supply (heavy bulls) and a material with global raw material competition and therefore priced out of the market (cows, heifers and lighter weight bulls). If we repeat last year, it will be another expensive summer, with players only accepting the realities in autumn.
Business this week was once again limited to gap fillers and the regular programmes in Europe. From Asia we had the usual checking of offers to see which seller is willing to budge. We don’t think that the equation of supply and demand will change, but buyers in Asia would be willing to book some business for cows at 10% below the present abattoir levels, which cannot be accepted considering the currency market. That saw very few hides sold once again and it is going to be interesting to monitor how the sellers deal with the situation in the next four to six weeks.
The kill: The kill was low and this will not change for the next few weeks. A holiday next Thursday followed by one in the first week of June will keep numbers pretty low. Weights continue to fall as well.
What we expect: One day we will exit the stalemate we have seen for many weeks. European business is running normally, but will be challenged from now on by the arrival of overseas hides and prices that are much more attractive. Asians are now just waiting for the right prices. We are not sure when it will happen, but cow and heifer prices will have to adjust to be an attractive alternative to raw material options from other parts of the world.
Share this story:
