Strong dollar dampens expectations

Sales of leather and finished goods may have been up in 2000 over 1999 but these rosy figures masked one of the least profitable years for China's leather industry as it grappled with record-level raw hide prices. Added to the rising price of raw hides and skins was the fact that most buyers in Asia were dealing in currencies that were weak against the US dollar. China's tanneries split into two types, according to Wong King-Hang, chairman of the Hong Kong Hide and Leather Traders' Association and adviser to many Chinese tanneries. There were those which went into 2000 with shaky management before the raw hide prices went up and found the pressure from higher prices too much to bear. Several Taiwanese tanneries with operations in China are reported to have gone out of business or at least suspended production. However, plenty of tanneries were able to take the raw hide prices in their stride, said Wong. Typically, a cowhide tannery in China using imported hides has had to absorb price hikes from US$50 per hide at the beginning of 2000 to US$70-plus by the end of the year, but has only been able to put their leather prices up 10-15%. 'Those that had a good position in the market at the beginning of 2000 and kept plenty of stock had a reservoir of materials to draw on when prices went up, so they could absorb the price rises gradually', he said. 'They are still working quite well, especially those making garment leather, which along with the upholstery tanneries are the most active at the moment', he added. Sourcing hides and skins from the west of China and the neighbouring central Asian republics has provided a lifeline for Chinese tanneries unable to afford higher quality imported hides, but industry sources report that these cheaper supplies have also been affected by an outbreak of foot-and-mouth disease in the area sending both sheep and cow prices up by approximately 20%. The tight supply of raw hides is expected to continue for the first six months of 2000 and as a result we can expect to see more China-based tanneries trimming back production to keep costs down. The big question is: will the local Chinese supply of rawhide improve? Many local rawhide suppliers want to go international, but sourcing hides is still a haphazard affair compared with developed countries. China has virtually no frozen beef supply and so cows are still slaughtered in the towns and villages where they are eaten. 'The leather industry in China has upgraded in the past five years but raw material collection, delivery and preservation has not changed at all in that time', said one industry observer. There is talk of a couple of large projects that would begin to transform the supply of domestic rawhides. One is a ranch in Inner Mongolia and the other a processing plant for hides that would go from raw hides through to finished leather. The proposed site is in Gansu province in China's northeast. 'In the search for new raw materials opportunities the movement is towards the west of China', says the observer. Wong expects a convergence in China's tanneries, with the line between those tanneries using local hides and those working on imported raw materials becoming blurred in 2001. Although traditionally Chinese tanneries, especially in the north, have enjoyed a stable supply of raw materials from the local market, some larger-scale tanneries using local hides have already started using US and Australian imports too. 'On the other side, some tanneries in China's southern coastal areas like the joint venture and privately owned tanneries in Guangdong, which before would only work with imported hides, are also starting to work on local wet-blue and or raw hides', said Wong. 'In 2001 the market will become more homogeneous and tanneries will become more flexible in terms of what raw materials they can work with and what leathers they can produce', he said. Last year was a good year for imported leather, trading sources report. 'Business is moving, nobody's been crying. Tanneries have passed on the rawhide increase (to some extent) but there has been no resistance from the market. European price increases have been only moderate at around 6-7%', said Douglas Hsia, general manager of WLH International Ltd. However, prices for Indian kidskin have rocketed, due to flooding in Northern India which reduced supply, coinciding with increased demand as kid has come back into fashion in a big way. Those manufacturers at the better end of the leather footwear market have had a good year, said Hsia, but footwear manufacturers in China had to steer clear of the low-end market to survive, he explained. 'In 2001 the best quality producers will continue to have the best business. People who came to Dongguan eight years ago as factory workers now have their own workshops and they compete with their former factories in the low end of the market. Hong Kong and Taiwanese manufacturers that cannot upgrade and stay clear of the rat-race will slowly go out of the business altogether', he predicted. This is good news for European producers of medium-quality footwear leather as the Chinese footwear market moves into a period of consolidation and upgrading. For upholstery leather producers, however, the gold-rush period is over. Chinese tanneries did not take long to catch up with their European counterparts in making furniture leather, at least for local consumption. 'We are certainly facing stronger competition from Chinese compared to two years ago', said Lorenzo Mari, export manager for Peretti Group Asia Ltd. However, the chaos in the raw materials market still gives larger tanneries such as Peretti an advantage because they are in a stronger position to negotiate stable supplies. Moreover, Chinese tanners are still not proficient at producing consistent quality upholstery leather, said Mari. 'Domestic market sofa makers are buying a lot of leather domestically because for this kind of customer a slight colour difference from shipment to shipment is not a major problem. But if the end-user is overseas each delivery needs to have stable characteristics', he said. Whether leather sellers eyeing the China market do so from a distance or from within the country, one factor applies to all: lead times for leather products manufacturers are getting tighter all the time. Tanners and traders must be able to respond to that if they are to win and retain market share.