Don Ohsman's view from America

During the course of a leather show in Guangzhou China at the beginning of June, the Chinese Leather Industry Association, believed to be speaking on behalf of the Chinese government, notified the trade of a revision to the December 2005 edict of increased import/vat taxes to be imposed on raw hides being imported into the country. Under the law in effect as last January 1, any tanner who wished to bring in raw hides would have to pay, upon arrival, a duty/tax situation amounting to nearly 25% of the cost of the raw material. He could recoup about 15% of this if he made an arrangement with his customer, when the leather or product made from the leather was re-exported.

However, the December tax law said that tanners who had existing permits (called handbooks by the Chinese translation) could use up what permits they had that were not expired, but as they did so, they could not be renewed. In Guangzhou, the CLIA said that the government was changing this and now, although they could not obtain any more permits than they already had, the new tax/vat would not come into effect until the end of 2008. For 2007 and 2008, importers could obtain permits for the same number of hides as they had for 2006.

This eliminated pressure on those tanners who, so far this year, had bought 46% more American hides than last year's record quantity in order to receive hides before their handbooks expired. The end result was a sharp drop in Chinese buying and packers finding it difficult to find buyers for the first time in months.

This impacted hide prices in a levelling off of benchmark Texas steers at the same $69 level seen for several weeks. One big difference, however, was that for the first time since January, already over sold packers were unable to sell their weekly production at $69 or better. Little interest was seen and then only mostly at $68.

As was the case for Texas, trading in branded steers through June was on the low side. Major productions fell to $66 compared to $67 in May. Supported by domestic tanners, but also seeing some export interest, butt branded steers traded, for the most part, at $68.50 early in June but fell to $68 by mid month. Producers were not generally as far forward on this selection as Texas and branded steers but also found better tanner reception as deliveries could be made in three to four weeks in lieu of 2-4 months for Texas and branded steers.

As was seen in other steer selections in the first part of June, prices were steady to late May. Some heavy natives steers traded as high as $70. Most productions sold between $69-$69.50 depending on average and origin. Tanners who tried to buy lower were met with packer logic that natives should be worth at least some premium over Texas steers. However, by the third week of June, prices had fallen across the board by $0.50 with $69 being traded and tanner efforts at $68.50 a possibility by month's end.

Producers were able to move some volume in branded heifers in June, after being stymied in late May. Southwestern light brands sold at $59.50-$60. River area producers saw decent interest at $56 but in at least one or two cases were able to successfully hold out for $57. By the end of the month, some volume at river points had taken place at $56 to a high of $56.50. Heavy native heifers found limited demand but some managed to sell early, steady at $60 before succumbing to bids at $58-$58.50 by the last days of June.

Cows that had been in tight supply in March and April became so prevalent in June that prices fell as much as $3 in some cases. Western and southwestern productions sold down to $42-$42.50 while northern processors did well to obtain $43-$43.50 as July began. Holsteins did better, due to well forward producers with prices holding between $55-$56.00 on very limited volume for fall shipment.

From our perspective, the main thing that kept prices from actually falling far more than they did after the Chinese announcement was the well forward sold position by major packers. However tanners, especially in Asia, were in a great many cases able to obtain increases in leather prices this spring, for the first time in years. They were also pleased to cover their leather sales with more hide purchases than normal. Handbook expiry in China was only a portion, albeit a sizeable one, of the increased hide demand that was also due to better footwear and upholstery business.

For the most part, regular consumers of heavy Texas and branded steers, which constitute the overwhelming majority of US production, are just as well bought as producers are well sold. Although the total outstanding raw and wet-blue sales for export still stand at or near a record high of 6,203,300 pieces, foreign tanners, led by China, Korea and Taiwan, have also contracted to buy far more hides than normal. We cannot believe that leather orders for Asian tanners have expanded to the degree indicated by the increased percentages bought by each country especially China, that is up 46% from a year ago.

In our view producers wishing to still capture all of the business they can at currently high levels, will continue to acquiesce to bids incrementally lower in the first part of July if not longer, and continue the downward trend that is only just getting started. Traders with long positions, should exacerbate this situation even before producers accept lower prices. From our viewpoint, it appears that most tanners can out wait producers.

Bottom line: far extended producers + far forward bought tanners + a number of weeks of less hides being sold than produced = still lower prices.

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