Prices of all US raw materials have fallen steadily since May when a combination of good consumer demand and a reduced supply of quality raw hides led to a massive price hike on all selections. In the August edition of Leather International, Ken Purdy, president of Prime Tanning was quoted as saying: ‘I’ve been in the business for 42 years and I’ve never seen a supply shortage anything close to this. As desperate European manufacturers bid for American hides, US tanners are paying as much as 25% more for hides.’

Now we realise just how much of an impact the increase in raw materials coupled with other global trading conditions has had. At the end of August, Prime Tanning announced the closure of two of their facilities in the US (see news) and has opted out of finishing in North America altogether. Prime have decided to switch production to their factories outside of US, primarily China. Salz Leathers, another well known side leather tanner from California, have also decided to close their doors after finding the going increasingly tough in the US (see Leather International news, September).

The effect of the increase in raw materials on domestic tanners is seen as the final straw for many, and the current climate is summed up by Leather Industries of America president, Charlie Myers: ‘With business down and margins very slim to begin with, the industry did not need the distraction of BSE showing up again in Europe followed by foot and mouth disease outbreaks in Europe, Asia, South Africa and south America. As a consequence, raw material prices climbed to near record highs because of panic buying in fear of hide shortages.

‘This is one of the rare occurrences in the law of supply and demand when both a high demand for leather and perceptions of shortages of raw materials on the supply side combined to severely inflate the cost of raw materials’, he said.

Korea and China lead the way

Despite the falling number of domestic tanners, the demand for the relatively high quality US hides has not diminished and instead shifted across the Pacific to south east Asia, particularly China and South Korea.

Table 1 shows that China took 2,225,000 more cattle hides in 2000 than they did in 1995 and more than two and a half times as many hides than just five years before. The opening of several large tanneries such as Prime Asia and Shanghai Richina, producing ‘America lifestyle’ leathers in China for local footwear companies combined with the increased free market stance of the Chinese government, has led to a surge of buying US raw materials in recent years. Effectively, the tanning industry has been forced to follow the footwear industry into China. With the acceptance of China into the WTO, this trend looks set to grow further in the future.

Other major purchasing countries in the region such as South Korea, Thailand, Taiwan and Hong Kong have seen their level of buying raw hides from the US remain relatively constant over the same period. Only Japan has seen a fall. This mirrors the decline in the Japanese tanning sector coupled with the low growth of the overall economy.

South Korea still remains the largest buyer of US hides, taking 7,673,000 pieces in 2000, more than double that of China.

The other significant purchaser of US hides is Mexico. Table 1 shows that following the signing of the Nafta agreement, exports of US cattle hides across the border rose sharply and have remained stable at more that two million pieces per annum. 1998 and 1999 show particularly strong exports to Mexico. However, the cooling of the US economy is starting to have a direct impact on hide exports to Mexico.

Price decline following panic buying

While hide availability has fallen in other regions of the world, the number of US hides available has remained stable. Table 4 indicates that the US total estimated slaughter has remained just over 35 million head between 1995 and 2000. Table 6 shows that last year there were 38.4 million cattle hides available and nearly 21.7 million (56%) of the total were exported leaving nearly 16.7 million (44%) for domestic use.

Prices in all categories rose sharply throughout April and May following panic buying from Europe as the full consequences of BSE and foot and mouth struck Europe. However, since May prices fell for a record 15 weeks until the beginning of August when they rose slightly only to fall further in subsequent weeks. At the start of September, US hide prices were more stable but the market remained quiet.

According to table 7, prices in all categories (except spready dairy cows and native bulls) are lower than they were in the same period in 2000. Typically, prices are US$3-5 per piece below the levels of last year.

The future: A global recession and the vegetarian lobby

Hide suppliers and tanners will have to address two significant problems in the coming weeks and months, which may cause serious medium or long-term problems to the industry. One is the slowing down of the global economy particularly in the US and the other is the growing threat of the ‘anti-meat’ lobby to the sector.

Raw material prices in the US have continued to fall throughout the summer months of the Northern Hemisphere, as demand remains low. US automotive sales in July slipped to the slowest pace so far in 2001. GM, Ford, Chrysler all reported lower sales, although some non-US makes such as BMW gained. The US Federal Reserve announced that GDP increased at an inflation adjusted level of 0.7% in the second quarter down from 1.3% in the first.

Major world stock markets have also continued to fall throughout August and well into mid September while the pages of the national newspapers are full of job losses and the deepening economic crisis in Argentina.

According to a prediction from a US Commerce Department economist, American shoppers could end up paying as much as US$1.5 billion for leathergoods over the next year due to the raw material increases witnessed earlier this year.

American consumers have not yet felt the price increases because many US retailers have long standing contracts and are still paying pre-crisis prices for their finished leather.

The other and potentially more damaging threat comes from the pro-vegetarian lobby who are increasing their pressure on the consumer to move away from meat and leather products. The extreme actions of organisations such as the People for the Ethical Treatment of Animals (PETA) are having an effect on the minds of the consumer. Large American companies such as Eddie Bauer, LL Bean and Timberland have recently told PETA that they will not purchase Indian leather due to unfair treatment of some of the cattle prior to slaughter. This could be the thin end of the wedge if the anti-meat campaign gathers momentum.