Change across the industry

24 August 2005

The president stated that the pattern and basis of world trade had changed so much from when ICHSLTA was founded in 1929. China now represents 25% of global GDP growth [measured as purchasing power parity]. He added that the pursuit of cheaper operating costs is occuring even within China. The Pearl River Delta, centred on the Guangdong province, is currently losing business to the Yangtzee River Delta (PRD) centred around the greater Shanghai region including Zhejiang and Jiangsu. Worsening pollution, infrastructure and power bottlenecks, severe labour shortages and rising wage costs are taking the edge off the PRD's success. According to HSBC, it is investment not consumption that is driving China's import demand. As a result, speculation is rife about overheating in China's economy. The main risk of excessive growth is the inability of China's financial system to allocate capital efficiently. Excessive borrowing is likely to lead to another wave of bad debts. On some estimates these amount to between 40-50% of all bank loans. In his opening statement. Bonefant also welcomed Ed Godsalve, the new representative from the United States. Beef At the meeting John J Reddington, president of United States Hides Skins and Leather Association gave a presentation entitled 'BSE Impact on US beef packers and hide exporters.' He said that the US and Canadian cattle and beef industries operated largely as a single North American industry prior to discovery of an animal infected with BSE in Canada in May 2003. A substantial amount of this trade flow was cattle movement from Canada to the US with 1.7 million cattle exported in 2002. However, exports from Canada to the US were suspended and this suspension has had a profound impact on US processors. On December 23 of the same year, the US Department of Agriculture announced that a Holstein dairy cow in Washington had tested positive for BSE. It was later confirmed that the cow had originated in Canada. This caused many US trading partners (beef and hides) to close their borders to imports of US products. The main export markets for US hide exports are China, South Korea and Taiwan which account for 80% of total US bovine hide exports. In the United States of America, the actual cattle herd numbers reflected the ninth year of contraction in supply. More than 50% of all hide and skin exports are made up of raw cattle hides and 86% were sold to the top five markets in 2004. These markets are China/Hong Kong (which have risen more than 25% in volume but less than 10% in value) and South Korea (although exports are dropping). US exports of beef and beef products suffered in 2004, as markets continued to stay closed. Hides to all countries were banned for a few days, in some instances a few weeks. Two countries, Vietnam and Thailand, continued to ban US hides until April 2004. But this has not seemed to affect the industry. In fact, US bovine hide exports for 2004 reached $1.057 billion, up slightly from $1.052 billion in 2003. The US beef industry has suffered significant economic challenges in 2004 due to lost export markets, tight cattle supplies and cuts in production at meat packing facilities. Additionally, there has been a renewed effort by Canada to increase its slaughter capacity, thereby further exacerbating the problem for the future. Canadian slaughter capacity increased 22% in 2004 and is expected to increase by 18% in 2005. US packer profitability is at a 30 year low. The National Cattlemen's beef Association claims that over two dozen Canadian plants have been built, expanded or targeted for expansion since the border closed. With reduced cattle availability, failure to operate at capacity creates a major competitive disadvantage for those plants and firms. Reddington predicts that eventually some US plants will be forced to close. Due to the fact that older animals were not destroyed in the USA, the four cases had little long term effect on hide prices. With high US prices in early 2004, world tanners began experimenting with less costly hides from other countries. Demand for American hides has been under pressure over the past few years by the emergence of Europe, Brazil and other South American countries as a source of hides. Even European hide suppliers with decent quality hides at expensive price levels have been contacted by Asian tanners who find that the current dollar/euro exchange rate makes the European hides competitive. According to an FAO report, the leather industry relies, to a great extent, on bank credits for much of its operations and because of the poor performance of the global leather sector since the late 1990s, financial institutions in several countries are now setting stringent conditions for the leather industry to access necessary operating loans. As a result, tanners have been forced to sell their products at prevailing low prices, which in turn have provided additional downward pressure on prices. These factors have generally resulted in a demand decline and thus lower prices. This situation has caused a number of leather companies in many countries to close or greatly scale down their operations. Global production of hides and skins is expected to continue growing at a slow rate until 2010. Slow or negative growth in production in developed countries is expected to be upended by faster growth in developing countries, particularly in South America where breeding herds are expected to expand in order to satisfy domestic demand for meat. Nevertheless Reddington anticipates US hide and skin exports will grow at a rate of 3% per year for the next five years. More than 50% of bovine hides and approximately 40% of sheep and goat skins are processed into footwear. The Far East is expected to continue being the most important net importer of bovine hides with imports projected to grow by 1.24% per year to approximately 1million tons by 2010. It is likely that, given the tanning and footwear manufacturing capacity in China, most imports in the Far East will be in the form of raw hides for processing and re-export to other developing countries. Latin America is expected to account for 10% of global bovine consumption by 2010. Reddington believes that an integrated North American cattle and beef market benefits both Canada and the US. The harmonisation of BSE regulations in North America will promote free flow of trade between the North American countries. Not only will Canada and the United States need to expedite these regulations to avert future cross border problems but Mexico must also be included at a swifter rate. Additionally, there needs to be international harmonisation of trading rules for countries that have been diagnosed with cases of BSE. Once these international standards have been agreed upon, then each country needs to adhere to them because, unless the world's major beef exporters move closer to accepting OIE standards, trade disruptions and further economic distortions will occur. On the positive side, Reddington predicts that BSE will be eliminated in North America in the near future. In the meantime, we should see beef trade recover to its pre-BSE levels within the next two years, while hide exports will continue to grow.

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