Macroeconomics

Most of the summer action in the financial markets has been related to the Ukraine conflict or to speculation over whether it is time for the US’s Federal Reserve (Fed) to pull out of its quantitative easing programme and raise interest rates.

The labour market in the US has delivered a good performance and consumer confidence is reaching levels not seen for almost 10 years, so observers are suggesting the Fed should collect some of the excess liquidity that has been injected into the markets since the financial crisis began in 2008.The US economy expanded in the second quarter by a decent 4%, which makes it all the more likely that the Fed will reduce the policy faster than expected. For the moment, tapering continues and interest rates remain low.

Private consumption and durable goods in particular accounted for a big portion of the expansion of the US economy and cars and furniture performed particularly well. This boosted the value of the USD and made up for the losses the dollar has suffered since the last quarter of 2013.

The eurozone remains fragile. Spain is beginning to add jobs, Germany is performing well, but in general things are not substantially better. The problems of one of the biggest financial institutes in Portugal [Portuguese authorities are providing $6.6 billion to prevent the collapse of Banco Espirito Santo] reminded many that not much has been achieved so far.

The Ukraine crisis is an endless wrestle between the East and the West and the strong position of Russia’s president, Vladimir Putin. It is reminiscent of the Cold War and the sanctions will certainly harm many businesses, not to speak of the general risk of an escalation of tensions between Russia and the West.

To support their local reputation, the government in Moscow is not willing to come to the negotiating table to resolve the tensions, which makes progress difficult, and the West has to learn that its hope of influence in the region is too optimistic. The first companies are beginning to feel the effects and are some preparing their investors for negative impacts.

Japan continues to present a pretty poor performance and last week’s sharp decline of industrial production has put another question mark over its economic policy.

Most commodities did not move by much. It is interesting to note the prices for oil and gold have taken hardly any notice of recent market developments.

Market intelligence

This is the first of the summer reports and will consequently be a bit shorter, because very little is happening. In Asia, the Western summer holiday is not traditional but habits are changing. Many will take a few days off or arrange business trips in combination with a vacation.

Even though workers in the US are not blessed with as many holidays as their counterparts in Europe, it is fair to say that the next fortnight is going to be slow, and possibly as quiet as the Christmas period. However, beef production doesn’t stop, and many are already beginning to prepare for after the lull.

The markets are developing in a classic summer pattern. The suppliers are trying to prevent the market declining because of inactivity and several tanners are not interested in a correction at this time of the year, because they will soon have to meet their customers for leather price negotiations for the coming season. So, greater market volatility is not desired by anyone. So far it is working pretty well for everyone.

However, the fundamental questions remain unanswered: What can we expect from the next leather season? What are the trends, what is the fashion, what about the pricing in retail? Will there be an impact from the political tensions? Are financial resources sufficient? And many more.

The irritating factor is that, except in public trade reports, no one reports any buoyant business and firm prices. The numbers do not fit. The price tags are raised, but the numbers of sales decline. Strange, if one looks at the offer lists and a week later at the official sales numbers from the US.

However, several suppliers from other parts of the world like it, because the combination of higher asking prices in the US and a stronger dollar offers far better selling options than several weeks ago and they are pleased to see many customers in the past weeks buying alternatives, which look far more attractive.

Those who are satisfied with their order books don’t complain about business, but are admitting their shipments are not at the same speed as their sales. Most of the regular and reputable suppliers speak about an average of two to four weeks’ delay between the contracted shipping period and the arrival of letters of credit, which allow them to move product. We are not hearing about any cancellation or failures, but the situation is not reflecting a solid market.

Some of the larger importers and wholesalers of raw or wet blue in China are also very prudent about what they expect. The majority of those we spoke to were complaining about the consequences of the closures in Hebei [tanneries that were deemed to fall below environmental standards were closed by the Chinese government]. Many of their clients in the region couldn’t take their deliveries, many had cashflow problems and many were worrying about their stocks and valuation. The ones we spoke to said the situation is beginning to ease and most of the stocks have been cleared, but with losses, and they are quite cautious. They added that they had delayed many shipments until the fundamental problems are resolved.

The only straightforward businesses are the group of large, industrial players and the automotive tanning industry. Large order books in the auto industry and high sales in most of the established markets make it pretty clear where most of the raw material, which should have been hanging in the market since April, has been absorbed.

However, we are witnessing a widening gap between the standard articles and the non-standard ones. Tanners with a good network, good raw material knowledge and flexibility are finding a number of attractive raw materials offered at prices which are far lower per square foot than the standard items quoted every day as the market reference. In our opinion, there is good money to be made if one knows how to select. The month of August will certainly not give us any answers, but anyone who is willing or in the position to act accordingly might use the holiday break to check what this could mean if the conditions allow.

At this stage we believe that we are again at a junction in the leather pipeline after the extremely strong performance of recent years, and the industry is looking for a new and safe market order. The present price spreads and conditions cannot be justified if the normal calculations and standards are used. Either we arrive at new definitions of value or a restructuring of prices is required.

The split market is the same summer doldrums as the hide market; the fundamental problems are the same. Product flow is not intact and there are many problems to be resolved. The Shanghai leather show [ACLE, September 3 to 5, 2014] might give us some direction, or when production is back on track in September we might see light at the end of the tunnel.

There have been no real changes in the skin market, either. The summer lull, Russia and the Ukraine, uncertainty of fashion and shortage of money are the main factors. Strong businesses have realised many prices are low and unlikely to fall much further. A little money buys a lot of skins these days and some are picking and choosing, knowing that the possession of cheap raw material has never been wrong - although some always think it can go lower. However, like with hides, the good sellers are still reasonably comfortable while others struggle to keep their product moving. We can’t see any changes in August.

For the next two weeks we think the market will remain as it is. Suppliers will not change their attitudes and with the ACLE only four weeks away there will be no one willing to change prices, other than to test if more can be obtained.

Various big players will also pave the way for their trips to Asia and customer meetings and this is certainly not done with pessimism. Quite the reverse: it is easy to see that they continue to play the supply card and tease buyers with the risk of not enough material. As long as tanners are not in the position or not willing to react and consider alternatives, the strategy might work. You can only buy what the owner is willing to sell and only at the price he accepts. The more you narrow your perspective, the more you have to pay. 

So, for the coming weeks, we think the market will be in balance and stay where it is.

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