Where will it stop?
4 December 2012“Up and up it goes, and where it stops nobody knows” is an appropriate quote in today’s market environment. In discussions with industry members, all are baffled by the continued strength in raw material prices, especially in the US, but, as it already does, it all really comes down to supply and demand.
In conversations with a number of American brands this week, all admitted that they either already have or know they will soon have to pay more for their leather in order to secure adequate supplies. Upholstery is no different. All are prepared to either shrink their margins, or get their customers to move beyond their own price points and absorb the increased leather costs that the raw material market has necessitated.
By the same token, the typically under bought/ inventoried tanner also knows that in order to keep operating and fulfilling his commitments, he has to find a way to borrow more money than ever thought possible, and in large part, operate with less inventory than ever before.
Is there an end to this syndrome of shrinking or continuing negative margins? Ultimately, there always is, but nobody with whom we speak each week are able to foretell when.
The only chink in the armor of the American hide market is not more substitutions, which is still a factor, but alternative supplies. Tanners keep telling us that they are sourcing in origins previously unimaginable and are pushing their chemical and machinery suppliers to make the needed leathers out of poorer quality hides. This has already been seen in a pick up in interest for Brazilian and Central American hides.
What this translates to is that when enough tanners find a way to avoid US hides in greater number than heretofore (and it’s happening already) then packers forward positions will erode to a point, even with reduced slaughter, and they will have to accept lower bids. However, what will this do to tanner demand for other, origins, heretofore, substandard but far cheaper.
When? Good question. Not this week and maybe not this year, but as the American market continues to inch higher, alternative origins are looking more like bargains.
