MARKET INTELLIGENCE – 25.01.08

Macroeconomics

What can one write in the macroeconomic section these days? With the turmoil we are seeing in the markets at the moment almost every one is following the situation closely as the stock markets and banks have make the headlines almost every day over the past two weeks. So, as most people are following the situation much more closely than normal they are pretty well informed about the global situation.

Our concerns that we’d be facing a bumpy road in 2008 have been confirmed much more quickly than we thought. One now gets today the impression that the serious ‘grey flannel’ industry (money) has become even more like gambling in a casino, the only difference being that the losses in Las Vegas, Macau or Atlantic City are much smaller and the controls put in place are much better.

Even if the bigwigs of the industry are still trying to maintain their “we have everything under control” attitudes, they have lost all their shine and credibility in view of what has and what could have potentially happened over the past few months. Their image has been further sullied with the latest news about a French Bank losing around $7 billion, just because a single trader was ‘playing’ a bit. Greed has blurred rational thought in the banking and financial community at present and if there ever actually were security controls in place in the system they have either been ignored by the system itself or were just not adequate enough to prevent individuals from bypassing them.

Well, the consequences for the global economy are not yet clear, but it will not be easy to restore banks’ credibility and the damage might be far greater than that being discussed in the media today.

Turbulent times

As a consequence the last two weeks have been extremely turbulent as earthquakes shook the financial markets around the globe. The Fed finally had no other choice than to lower interest rates by ¾% to protect the markets from completely imploding. This might have brought some short-term relief, but the long-term effects still wait to be seen. The US government also had no other option than to put a stimulus package for consumers in place, which might be appreciated by the markets, but, is a) not good news for the budget and b) at least questionable with so many already being overspent in the country, and it will do nothing to resolve the fundamental problems.

Stock markets and currencies bounced up and down and as a consequence any recovery achieved by the greenback against the euro was pretty short-lived, while the (European and Asian) stock markets where able to recover well from their initial losses. The oil market hovered around the $90-mark and also did not show much reaction to the bad news.

The biggest question now is whether the driving forces of the recent global growth, the emerging markets, can sustain their strength and whether the euro zone can maintain its stability with very moderate growth.

Market intelligence

Market activity hasn’t really accelerated over the past few weeks which might be the result of a combination of various factors. One factor is certainly that January is generally a slow period as far as trading is concerned. European tanneries only get started again towards the middle of the month, Asian tanneries are winding down for their New Year break and the uncertainty seen in the financial markets has not offered any comfort or support for making long-term decisions.

So, not many have actually been complaining about their shipments or the movement of existing contracts, which is the good news, because it confirms that the production (demand?) has not yet really been hurt.

Critical issues

However, the market has some critical issues to deal with at the moment. One is certainly the totally unclear situation in Italy. Everyday more rumours are swirling around about possible payment problems and closures and re-openings. One large tanning group is said to have avoided its old obligations through closing down only to have already re-opened a new commercial enterprise in order to continue operations in a more efficient and cost effective way. There is plenty of speculation as to where the money is coming from when the old company has not honoured its debts and a new business has been opened (even under the same name) which is now offering cash advance payments to the same suppliers that have been let down before.

While this is not only bad news for suppliers, banks and credit insurers it is also annoying for the rest of the industry in the region, as people are — rightly so —complaining about unfair competition. One can only hope that the pipeline has the discipline not to support such activities. The upholstery tanning market desperately needs to be restructured and the production capacity deflated. It would send out the totally wrong signals if companies which have failed and already cost the market money before, were able to restart operations afresh and free from their old obligations. Even more so when one can’t help but have the impression that the money for the new operation has been slowly pulled out of the failing one in order to fund the new business. It is a pretty uncomfortable feeling when creditors are offered cash payments for new business (possibly) with the money they were waiting for from previous deliveries.

We will have to wait and see how the trade sorts this case out and since this is not the only one in question it might be even more important to wait and see whether there is any truth in the other rumours about further tanneries in the Arzignano region possibly shutting down. The present situation in the financial community is definitely not helping companies which are struggling and it is now more difficult than ever to refinance or recapitalise a company these days.

Europe remains under pressure

As a consequence the European market remains under pressure. Too many supply markets from all over Europe have been focusing on taking the ‘easy option’ over the last few years and have shipped their material to nearby markets which only required a truck and little administration. Not to speak of fresh hides as well. Since the total size of the market and production in the area has already been shrinking for a while, the excessive production of the high season winter kill is still seeking an outlet. As the demand from other markets is by no means endless or at the same levels as a year ago, the surplus production is struggling to find a home.

In such a market it is also far from easy to find new clients in the Orient as they either prefer to stay with old suppliers and the comfort of knowing about the product they will receive or need to be tempted with very low prices. Even then there are still a number of restrictions such as trade barriers in several markets or very high transportation costs. All these factors are weighing on euro price levels and only a handful of hide types are able to defend themselves in this market, as they are pretty specific to certain niche productions.

As a consequence we are seeing a wide spread of prices again all over Europe and smaller suppliers in particular are desperately looking for outlets. It is not just in order to make space in their warehouses either, in many cases it is also necessary for the sake of raising cash to maintain their business.

Price is not the key problem

Speaking to people who have been in this trade for a longer period, their main comments are that hide prices are not the key problem today. Although hides are certainly not particularly cheap, as, if one is mainly is looking at them in US$ terms, the recent declines have already been sufficient to return calculations back into profitable territory. In most people’s opinions it is presently a mixture of several factors. First, the deflation of production capacity — not only in Italy, but also in Asia for various reasons, which has led to a reorganisation of the product flow which has then added to a local overreaction in raw material prices. Second, we have a kind of a credit crunch situation and the general uncertainty over the outlook of the global economy at the moment is preventing strong hands from taking advantage of the generally favourable prices and supply situation.

One thing that is also certain: Unless one is not expecting a fundamental meltdown in the global economy, we have to assume that we are at the end of a longer process of correction. With the peak kill having passed in Europe, the supply situation is going to ease and as we all know is doesn’t need much of an upturn in demand to push prices higher again quickly. Presently we still have an imbalance of prices. Male hides in Europe are not yet attractive enough to redirect demand from Asia. After such a long bear market, buyers are not yet taking into consideration that raw material is still rather short of sufficient and fashion remains another unclear factor. However, continuing to look at Europe, just a moderate recovery of the US$ would change the market and price pattern quickly. Many may admit that there is not much chance of this in sight, but it is always better to be prepared rather than to ignore the possibilities. What many people in Europe are also not taking into consideration is the fact that a lot of their local price correction is US$ induced. Looking at international prices quoted in US$, the price corrections in other markets have been relatively limited.

Excessive stocks

As we have already stated, there are still some excessive stocks lying around in Europe which still need to be absorbed, but we believe that the size of these stocks is certainly not as huge as many might believe. A moderate upturn in demand would not take much time to wipe away the inventory that is burdening many today.  

So, for those who have faith in their business, and have money and courage it might not be a bad idea to slowly investigate where and what could be of interest and available for a possible bargain hunting tour.

Skins swept up by China

We fail to be able to deliver any news for or from the split market. The was no sign of any movement or specific interest and it seems that there is not much to expect before the end of the New Year break in China.

On the skin market the Chinese are continuing to sweep up what is around — as long as it is large and full wool. It’s their season for buying and shipping and with them finding a shortage and high prices in their favoured origins of the Southern hemisphere they are currently buying whatever is available around the globe. Prices have increased moderately, because not many more skins are available and the restrictions of buying directly from the UK are also pushing levels, too. We sense that there is still more interest, and enquiries, but so far the Chinese buyers are not yet willing to commit to higher prices and much higher volumes for shipment after their holiday break. However, the woolskins market has a solid base and might even still have a bit of room to advance.

For the coming weeks we believe that a lot will depend on the news from the financial markets. Additionally it would help to know what is going to happen in Italy and if the whispers finally turn into fact and we see further tanneries close. Since there are also rumours about some Spanish tanners and shoe factories this kind of news will have a major impact. Since we do not expect too much positive news and buyers are not likely to be in any hurry there is little chance for anything better in the short-term. We have already described above what we believe to be a suitable strategy in the medium-term.

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