Extracts from the Sauer report

It is just as clear (but nothing new) that the overcapacity of tanning in the world and also in China keeps finished leather prices low, while high raw material prices make margins for tanners extremely difficult to realise. There is no clear reason why raw material prices should show significant changes in the near future. The global supply position remains generally tight, while finished leather prices have a clear top limit. Tanners must manoeuvre through the wide range of raw material on offer to find the one that leads to a profitable business for them. They are more than ever ready to switch origins in order to reach that goal. The quality, volume, delivery time and other problems which come along with such choice are of secondary importance. If such problems occur, they can be solved but if a tanner is too expensive to start with, he will never have any business at all! Demand is for low prices first of all. Due to high production costs in Europe, this demand for cheap material simply does not fit the bill for that continent at all.

The upholstery tanning business in China is plagued by reduced orders from the USA which could be related to disappointing automobile sales there. Some voices say they noted plenty of raw stock in several of the bigger Chinese tanneries, discouraging them from buying more.

Others say the Chinese will simply not look at leather costing more than US$1 per foot in wet-blue. This even stopped sales from Brazil where tanners increased prices and tried to get more.

More complaints are being heard in China about the reducing quality of American hides. In Asia, activity was reduced in general. Europe was on holiday. China is feeling the financial restrictions imposed by the government. This especially affects the smaller players.

In mid-September, South Korea, Taiwan and China all reported that their business volume was below what it should be. This is said to be an argument for not hurrying to buy new raw material, to be able to play the market and wait for lower prices. True or bluff? Probably the answer is different for the different players. True, there are also tanners who, by now, are feeling the raw market will not drop further. It is a matter of opinion.

Reports from Asia state that although China rules the market for cheap garment leather (part of it taken from Türkiye), India can produce the leather even cheaper. Good quality baby calf leather is offered by India at US$1.10 cif by air, a price that astounded many at the Shanghai leather fair. India produces very good qualities but is simply underrated by the big buyers. There seems to be an image problem. However, when it comes to manufacturing garments, the situation is different again. India can make the leather better and cheaper but not the garment. Manufacturing costs are more advantageous in China. Not surprising when looking at labour costs there.

A weaker US hide market (at least till the time of writing on September 20) put many potential buyers on hold. Upholstery tanners were looking for cheaper alternatives to the still high North American and European hide prices.

For Mexico, however, the weaker US hide market brought bull hides more within the reach of the Mexican sole leather tanners. Low grade and small packer business is better also.

Sheep and lambskins prices in Australia were firmer due to tight supplies. Recent statistics show that sheep slaughter in Australia for the fiscal year 2003/4 dropped 24% to 10.4 million head. This is the second lowest level since 1951/2 and the lowest in twenty years.

Brazilian wet-blue, which has become the major diet for the Chinese upholstery industries, faced price resistance as well. To add to the difficulty is the confusion about terminology and specifications. Each seller has his own TR or TR1 or TR2 or whatever name is given and at different price levels. The Chinese have yet to learn from whom to buy at what price for a given specification.

In New Zealand, sheepskin prices increased considerably due to low production. Offers are very scarce since most of the abattoirs have ceased production. Known as an exporter of pickled skins, New Zealand is said to be exporting large quantities of wet-salted skins to China now.

Hide prices continue to increase in Kenya. In all of east Africa continuous demand for cheap hides from China pushed prices up further.

From the African continent, east African hides are favourite with the Chinese. Interest for west and central African origins is limited because of small irregular quantities and less favourable transport possibilities.

In Nigeria, stricter actions by the customs authorities led to a total stop in wet-blue shipments a while ago. New rumours say a number of these containers of wet-blue skins have now found a way out of the country 'one way or another' (export of wet-blue has been forbidden for a long time). There is also a lot of confusion in the country about the application and implementation of the 20% export incentive for leather. The incentive became effective in the spring, was stopped in August because of supposed abuse and should now be reinstalled.

The various actions had tremendous impact on raw skin prices in the country. Export quotations remain about the same in all the confusion.

By August 21, the European industry was slowly returning to work, at least in the northern part of Europe. For the southern and most important part as far as the leather industry is concerned, few were in a hurry to start up their factories because of the generally still disappointing order situation. Some reports state that tanners have few stocks but since they have few orders also, having little stock is not necessarily a problem. Anyway this statement is nothing new.

In the Netherlands, one of the few tanneries left has closed down. In Italy, four well-established tanners in Tuscany have or will disappear. The only tannery in Northern Ireland is winding down its activities as well.

Tanners say that demand remains below level, while raw material costs are going up. Margins have reduced even further which has forced some to slow down production. The financial problems for a number of tanners in Italy seem to apply mostly to the Toscana area and further south.

In the north, such serious problems are seen far less. The Toscana problem is related to its close ties with the shoe industry, while the north is more dependent on the upholstery leather sector which is in better (but not in good) shape.

A number of sole leather tanners in Ponte a Egola in Toscana are said to be working only 2-3 days a week. Their warehouses are full of unsold leather. Rumours say a Russian tanner now wants to buy a tannery in Italy. If true, it proves the world has changed 180 degrees.

Good news from Europe is constantly lacking. The latest bad news is the recent bankruptcy of leading shoe brands in Germany (Elefanten and Salamander) and the chapter 11 position of Salamander's parent company Garant.

Ron Sauer

ronsauer@wanadoo.fr

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