Extracts from the SauerReport – July

1 July 2013

It seems we have arrived in the summer holiday mood sooner than one should expect. The hide market is stuck. The biggest buyers in Asia are seemingly having continuing problems with the opening of LCs due to the cash squeeze by the Chinese government. Orders are below expectations and we know some have bought more in the past than they need today. The government actions can also be the perfect excuse.

European sales are getting some help from the firmer US$ versus the euro which here and there allows a small reduction in price. Sales of European hides are not easier or more difficult than others with one exception: heavy male hides for car leather. There are still not enough of those. Everybody wants them so prices remain very firm and are unlikely to change during the holiday weeks.

The small skin market is slow. For lambskins the waiting is for the Chinese to come in but big buyers there have indicated that for them the current prices are still too high! As the Australian shorn lamb season draws to an end the market has firmed yet again on reducing supply and varied quality. Whilst most buyers from all countries state that their markets are not strong, the lower supply has delivered a late price spike. The market has been remarkably steady in the face of a wildly fluctuating AU$ which tumbled 15% following the potential of an improving US economy and weakness in China.

The focus all season has been on dense wool lambs with Russian mouton and Chinese car seat covers being the main price driver. An improved Japanese bed sheet market has also added to late demand.

Russian buyers have been content to leave prices in a steady US$ range all season and have been a major factor in maintaining market stability during periods of Chinese weakness.

The ugg market remains soft with major boot skin producers happy to pick up lower grades and priced skins to supply reducing ugg orders. Potential remains for ugg tanners to increase in the better quality spring lamb season but at this stage they appear to have lost their market dominance and play second fiddle to dense wool buyers.

Low grade lining production is still weak with low density skins still difficult to sell. In the latter part of the season this has definitely been the missing piece of the puzzle with the price variance between dense and less dense skins widening and low grade skins generally difficult to move.

Buyers forget that the Australian market is very different from ten years ago when packers held large stocks and were forced to meet the market if some major players withdrew their buying support. Packers now work on very low stocks and can absorb short term weakness by increasing stock levels slightly which softens any price correction.

A large Chinese Government backed trader in Sangpo continues to face difficulties having purchased expensive low grade stock from some unscrupulous meat companies and being blocked in their sales by some major buyers trying to force their prices down. Stories continue about their high stock and forced sales due to low grades and potential deterioration due to poor preservation. Many buyers still feel threatened by the potential dumping of stock by this trader and the effect it will have on the market. Whilst they clearly have a large inventory the effects would be short lived.

One of the big Chinese shoe companies Stella International, who operate 400 shops in China and produce footwear for top brands such as Prada and Givenchy but also for other well known brands like Clarks, Ecco, Rockport and Timberland, plan to introduce themselves as a classy brand on the European market. The company intend to sell their shoes in Paris in the price range €250-600 or one third of what Prada would ask.

The intentions are noble and understandable but your editor wonders if European buyers are ready to pay up to €600 for a pair of shoes of a Chinese brand they probably never heard of. The shoes will no doubt be of excellent quality but who knows they come from the same factory as those from Prada and the others? And paying high prices is still all in the name is it not?

A new report by IBISWorld says global footwear production advanced by an average of 4.2% in the period 2008-2013 to reach a value of US$113.6 billion. During this period the US and Europe lost some of their importance but emerging countries put the total up.

In the coming five years the figures should improve since the economies of the US and Europe are expected to come out of recession while the emerging countries will grow further.

The biggest footwear companies in the world today are all in Asia: Yue Yuen International Holdings Ltd; Belle International Holdings Ltd; Li Ning Company Ltd; Feng Tay Enterprises.

Car sales in China in the month of June numbered 1.4 million or about the same as in May. June sales were 9.3% over June 2012. May sales were 9% over May 2012.

These figures can be explained as both negative (no growth) and positive (the credit crunch didn't bite that hard). Take your pick.

It is very interesting to look at where the cars came from in June. Japanese car sales were up 16.5% to 2.3 million, Chinese brands were up 5.5% to 5.3 million, German brands were up 20.6% to 2.9 million and American brands were up 12.7% to 1.8 million.

The BMW Group (BMW, Rover, Rolls Royce) reported the highest six months sales figure ever (global sales, not limited to China!) of almost one million vehicles. This is a 6% increase over 2012.

As we know, most of these German top brands (BMW, Mercedes, Audi, Porsche) are equipped with leather interiors although nobody really knows how many out of the total. If sales of these leather cars keep growing, an alarm light should start flashing in other leather sectors which use hides.

The competition for cattle hides is increasing every year. And this is one important factor that pushed hide prices up and out of reach for many leather product makers. In the competition to get hides, the car makers surely have the financial possibilities to get what they want. But there may be a way out: the car makers cannot use sheep, goat or pigskins or other hide or skin types of inferior quality. Luxury car leather makers today are still looking for the best quality hides. All of these go into the most expensive cars. But soon there will not be enough top grade hides to even satisfy the demand for the most expensive cars. Hence car leathers will sooner or later be forced to procure lower hide qualities also and make the best of it.

But it is still unlikely cars will be equipped with sheep, goat and pigskins. Not in large numbers in the foreseeable future at least. Therefore, again the idea for other leather product makers: get out of the competition for raw hides with those car fellows!

There are unconfirmed stories about a big Korean owned tannery in China proclaiming bankruptcy recently. It says about 60 containers of hides are still in the port and will need to be resold.

Tanners in Wenzhou claim they still have plenty of raw material in stock and no need to buy fresh at this stage. This would fit with stories from African exporters who are regular suppliers to the Wenzhou area and who say their business to China is pretty quiet at present.

There has been no good news from the Pakistani leather industry for quite some time. Leather sector exports dropped by 17.2% over the last six fiscal years from US$1.2 billion to just $1 billion. This while exports in the leather sectors of China, India and Bangladesh increased by 47, 40 and 102% respectively! Jobs of one million people are at stake say the Pakistan Tanners Association (PTA). Pakistan lost 40% of its previous global market share.

Via the Italian tanners association UNIC, the Italian leather industry has protested with the European Union that with the present policy all raw hides may disappear from Europe by 2020.



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