Extracts from the SauerReport

Under the old practice no import duties and VAT were paid for such export trade. With the new policy the situation will be different. There will be no room any more for this type of wet-blue/crust contract tanner in China. They will have to re-register their company, get their own import/export permit, buy raw hides on their own account and pay the import duty and VAT.

This way they can produce for both domestic or export markets and do not need to have two warehouses and two sets of book keeping. However, if they want to avoid VAT for a certain portion of the production which they do intend to export, they will have to live with the nightmare of keeping two warehouses and two book keeping systems.

The Chinese do admit that the new policy to abolish the Custom Book practice has deregulated normal market actions and in certain cases has resulted in irrational reactions. The toughest problem in all talk about the amended import duty rules could be the new regulation's details on volume.

It says that even in the case of an extended custom book to 2008, in 2006 and 2007 a company can only use it for a volume no bigger than the 'tax free' quantity allowed in 2005. This sounds reasonable but we all know that by mid May the Chinese had already bought 74% more hides in the USA than during the same period in 2005. Thus it is very likely they have already purchased their total 2005 quota.

The million dollar question is now: are they going to buy more hides this year for which they will have to pay duty and VAT in spite of having an extended custom book? And only tanneries approved by Provincial EPA or higher authorities (not local EPA) are entitled to benefit from the extension.

We should not forget that since the CLIA announcement no further details have been published by the Chinese government and all that we (and others) are writing is no more than speculation and private theory. Meanwhile the Chinese tanners stay on the sideline to see how it will all work out.

There is strong demand for all African hides from Asia especially from China, India and Pakistan. One of the reasons is the fact that most other formerly economically priced hide types (Brazilian for instance) are found too expensive today. African hides are seen as an alternative but numbers and offers are few. This is either for political reasons as in Kenya but also because there is simply more demand than supply. Especially in West Africa there are countries which simply do not have a single hide to offer and are even behind with shipping pending contracts. The buying countries have huge industries to feed while the supplying African countries produce only very limited volumes.

Hide prices in Kenya and Uganda have hardly changed but since there is next to no business that will surprise nobody. The recent and actual strict controls by the authorities on the export of raw hides have taken all enthusiasm out of those who were occupied in that trade, except for the few who have always been entirely law abiding.

Some now move to wet-blue production and export which is also what the government wants. If the market also wants this is another question. This is not the first time that moves from raw to wet-blue have been undertaken and it has never worked.

In the end people always returned to exporting raw again because it was the only thing they could sell with a profit. It was done as direct export, indirect export, legal and illegal, correctly invoiced, incorrectly invoiced etc but the raw hides always ended up on the market that wanted to pay for them. Will it work this time?

Duty on wet-blue imported from Kenya into China is a very high 14%. The Chinese are trying to find a way to get certificates of origin, health certificates etc from other African countries to avoid this duty. This is not easy since the exporters would also need a customs entry declaration which only the country from where the shipment is made can issue. Sources in China report there are 27 countries in Africa which are exempted from this strange 14% duty.

A Chinese company is putting up a large size tannery in Jinja, Uganda. They hope to commence production at the end of this year and to process 1,500-2,000 hides/day. This could lead the Ugandan government to seriously consider banning the export of raw hides from that country.

A visitor to the tannery last week met the Chinese owner and the staff supervising the work and was impressed by the speed with which the job advances.

For Australia, hide demand from Asia has been good and better than from Europe but the latest developments in the USA where prices are weakening may quickly make buyers of Australian hides step back for a moment to see if Aussie prices will follow. Usually Australian prices follow the American trend. Renewed demand from Europe is unlikely since tanners are preparing for the summer holidays.

Sheepskin sales have been modest of late and prices lower. Fortunately the lower AU$ picks up some of the losses. It has been remarked that among the Chinese buyers for this article many new faces are seen.

Two factors of importance for the hide market are the possible re-opening of meat markets in Asia for American beef (which can influence kill figures and thus hide supply in Australia) and the final outcome of the import duty story on raw hides in China.

The lambskin market remains strong due to good demand from Russia and China. The season is coming to an end, however, and supplies are thinning. For new season lamb it is feared the season may be short this time because of the drought. This may force farmers to start shearing early which could result in fewer good quality skins.

The doubleface lamb business might experience a bit of a boost caused by good business at the recent leather fair in Moscow; orders for the Turks made easier by their devalued currency; the renewed strength of the dollar versus the euro; the approaching end of the doubleface season in Spain and the start of the season for same in the UK. Good numbers of UK skins reported sold at the very start of the season are considered a positive indication also.

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