Don Ohsman’s view from the US

15 September 2015

The difference in the market since the last report could not be more dramatic. Starting in the waning days of July, led by heavy Texas steers, the market found a bottom and prices began to turn around. As we go to press, these same heavy Texas, which are the most prodigious US selection, bounced from a low of $65 C&F for distressed sales up to as high as $72–74 C&F on 60/62lb. There were also stronger prices on most selections.

The difference in the market since the last report could not be more dramatic. Starting in the waning days of July, led by heavy Texas steers, the market found a bottom and prices began to turn around. As we go to press, these same heavy Texas, which are the most prodigious US selection, bounced from a low of $65 C&F for distressed sales up to as high as $72-74 C&F on 60/62lb. There were also stronger prices on most selections.

USDA export totals released in August for the period ending 30 July showed that combined raw and wet-blue export sales reached the year's record high of 1.158 million pieces. One school of thought, to which I subscribe, with regard to the recent record-setting sales total, is that a good many of these hides were not new sales booked for the reporting period. Instead, this business was caused by renegotiations, or higher price contracts, where letters of credit at the new price levels were finally opened. This then caused exporters to report them.

Combined raw and wet-blue hides that were sold and not yet shipped also rose. The combined total of outstanding sales made - but not yet shipped for the period ending 30 July - totalled 5.166 million pieces. This is the highest outstanding number since 2009.

This extremely high number is even more remarkable given that FIS slaughter is approximately 20% or more lower than it was in 2009.

It appears that this could be the peak of outstanding hide and blue sold but not yet shipped from very full warehouses. Hidenet has heard of a good number of letters of credit now coming to exporters and many more than the usual number of loaded containers heading for West Coast piers. The beginning of this trend could be seen in the reporting period where shipments rose 15% compared with the week before.

We have seen a decent market since the last days of March, where demand turned sharply lower, and yet so did supply. We see that the collapse of historically high prices occurred for a number of reasons. First, leather priced itself out of competition in finished leather products and tanners were not able to repeat the sales volume seen during the boom times of 2013 and 2014. Second, tanners, in China especially, with governmentally initiated credit difficulties, and far less consumer demand in their local markets and elsewhere as well, saw cancellations of high-priced leather sales contracts and volume reductions at the same time. Third, in a situation that created the 'perfect storm', tanner split credits fell at least as fast or faster than hide and wet-blue prices. The same leather products that used PU-coated splits (athletics) were 'designed out' like leather, favouring every synthetic substitute imaginable.

At the same time, slaughter declined and prices still fell. Why? Quite simply, demand. Had supply increased, for example, as much as it shrunk. I would think that prices would have fallen even further. The sudden realisation that leather business early this year was greatly reduced caused buyers to withdraw and do all they could, dishonourably or not, to live to fight another day.

The reason for the recovery in US prices seen during the past few weeks, I feel, has been primarily caused by prices getting low enough to generate profits for tanners against previous leather sales. This was business that they elected not to cover as the market was dropping. At the same time, many suppliers to these tanners renegotiated the highest-priced contracts in conjunction with new sales at lower levels, and this led to a well sold position on a good many selections for US producers.

While those members of the US trade that are bullish and patting themselves on their backs as they are seeing the need for more coverage in steers by tanners and traders, at the same time, packers now find themselves comfortably forward sold. On the opposite end of the spectrum are buyers who say this is just a blip. Fundamentals of poor leather business have not changed. As soon as any inventory shortages are covered, which could take a few weeks, the market is more than apt to retreat from its recent gains.

Leather business is still not any better. The Chinese economy that, in my opinion, created the boom in leather demand over the past several years, has been sharply reduced as a result and, most important, leather and PU cannot be styled back into leather goods for at least six if not 18 months.

For US producers, Hidenet recommends to keep well forward sold and hope that substitutes won't permanently replace leather in too many products.

Extracts from the Hidenet World Report

20 major meat companies in Argentina agreed a new industry plan at the end of July, outlining a series of measures they want to put in place to boost export revenues.

Part of the plan is to slow down slaughter-rates in Argentina over the next 18 months, and the packers involved in putting the plan together have also called for lower export taxes to allow them to boost market-share and create up to 300,000 new jobs in the coming years.

Argentina's cattle slaughter was 11.6 million head in 2012 and 12.9 million in 2013, an increase of 11.2%. In the first half of 2014, official slaughter was almost 6.2 million head, more or less flat compared with the same period in 2013.

Packers want to send fewer cattle to abattoirs and for prices to go up. They have said they will work with counterparts in the poultry and pork sectors to encourage consumers in the domestic market to choose these sources of protein instead of beef more frequently, allowing them to concentrate on selling Argentinean beef on export markets for higher prices.

This means fewer Argentinean hides will become available to tanners, but the packers who have come up with the new plan appear unfazed by that. The secretary-general of a meat industry labour organisation, Damián Deheza, said on announcing details of the plan: "Meat by-products such as hides have fallen in value by around 80%. Packers know they have customers for those by-products, but they cannot keep slaughtering animals because of that; the pay-back is too small."

Fleshed Queensland TFA meatworks cow/ox hides averaging 31/33kg were available at $59 a hide CFR. The weak US market has put downward pressure on Australian equivalents.

Beefcentral reported that against a background of declining slaughter numbers in southern states, Queensland's beef kill not only held up, but actually advanced 3% on the previous seven-day cycle, to just short of 89,000 head. The reason? Price.

Almost regardless of how much money is thrown at producers in coming months, however, eastern states kills will inevitably decline as the year wears on, as the collateral damage caused by two years of intense drought takes its toll. On top of that, August and September are traditionally hard months for processor livestock managers.

Eastern states' adult cattle slaughter has gradually reduced over the past two months, with recent kills down 7% from mid-May. However, to add perspective to just how high cattle slaughter still is, the average eastern states weekly cattle kills from 2009-13 was 134,000 head - still 30,000 head below the current level.

In southern states, NSW recorded kills of just short of 38,000 head, 4% below the week previous, and 9% below a year ago. Victoria was -3% at 24,000 head, back 18% compared with a year ago, while South Australia was -3% at a little over 8,700 head. Tasmania improved its numbers a little, shifting 5,000 head, up 6% compared with a year ago.

Prices were lower again recently, with bids at $1.20/ft2 CFR and asking prices at $1.30. Tanners had difficulty in finding bids especially with Europe closed for mid-year holidays. Slaughter remains significantly reduced compared with last year.

Some analysts say that the total turnover of China's tanning sector saw a growth of 8.4% to the value of 146.1 billion yuan in the past 11 months; in terms of profits margin, it grew 20.9% to 9.63 billion yuan compared with the same period in 2014. For the total sales revenue of leather products sector, a rise of 12.1% to 255.86 billion yuan was seen, and the total profits of 16.42 billion yuan achieved - rising 15.1%.

It is remarkable for China that the leather industry achieved a good performance this year on such an increasingly competitive market environment, showing the vitality and power of China's leather industry. Currently, China produces 23.33% of total world leather, which is equivalent to 70 million pieces of standard hides, but still weak in quality and brand value, although powerful in production.

Wet-salted hides sold at $1.25-1.30/kg CIF Asian ports. The hides were 24-26kg, all machine pulled 70/30 A/B.

The Hindu Times reported recently that despite a poor trend prevailing in the European market, the Indian leather sector has posted a marginal growth in exports for June 2015, when compared with May 2015.

However, for the quarter ending June 2015, the Indian leather sector exported goods worth $1.57 billion against $1.65 billion for the corresponding quarter last year, marking negative growth of 1.51% .

On the dismal performance, Council for Leather Exports chairman Rafeeque Ahmed said that the Indian leather sector faced a series of problems such as the economic conditions in the Europe, the fall of the euro, and economic sanctions imposed by the European Union against exports of goods to Russia and vice versa.

According to the World Footwear Yearbook, India was the second-largest footwear manufacturer in 2013, with more than two billion pairs (corresponding to a world quota of roughly 9% behind China - more than 60% of the world production).

Figures prepared by the Bank of Indonesia suggest that the Asian country's factories operated at just over 73% of full capacity in the first quarter of 2015, the lowest level the bank has recorded since the end of 2013.

The rate for leathergoods, footwear and textiles was the highest of all those analysed for the three-month period at more than 77%, but local industry body Aprisindo has said demand for shoes is falling, domestically and overseas, owing to weaker purchasing power among Indonesian consumers and currency exchange rates that make Indonesian products expensive for buyers in other countries.

The country earned a total of $2.40 billion from the exportation of cocoa, rubber and other non-oil commodities, such as raw hides, skins and leather within the 2014 fiscal period, figures obtained from the Nigerian Export Promotion Council have revealed.

The country's export figure of $2.40 billion for 2014 represents a decline of 19.19% over the $2.97 billion earned in the previous year. A breakdown of the non-oil receipts of $2.40 billion showed that cocoa exports with a total amount of $666.45 million accounted for the highest non-oil export earnings, followed by raw hides, skins and leather with $487.97 million.

The Business Recorder reported recently that an alarming declining trend in finished leather exports was registered in 2014-15, which showed a drop of around 11.36% during the current fiscal year from July to June. Besides the above, only 21.106 million square metres of finished leather were exported during 2014-15, which registered a decline of 28% in quantity when compared with the corresponding year of 2013-14, which was at 28.348 million square metres, which is alarming. M Musaddiq, chairman, PTA, said that the cost of doing business in Pakistan has increased to an exorbitant extent due to the unnecessary burden of taxes imposed on the leather sector by the government.

In Kampala, Uganda, leather manufacturers say the government should come up with special financing schemes that target the sector in order to transform it.

According to Oscar Ankunda, project manager at the Industrial Promotion Services (IPS), which owns Leather Industries of Uganda, a leather exporting company, the industry requires long-term financing schemes that are difficult to be sourced from local banks.

"As the private sector, the passing of the policy is good, but we think that the government should come up with special financing schemes like it has done for the agricultural sector and the Youth Livelihood programme," said Ankunda.

"This will enable tannery companies to access finance at cheaper costs, hence helping us to acquire modern machines."

Ankunda said tannery machines from Italy or India are expensive and take more than six months to arrive, making it very difficult for them to rely on local financial institutions. It means that the debtor will start paying interest on the loan before the arrival of the machines, which increases their cost of doing business. He said if the necessary support is given to the leather sector, multiplier effects on Uganda's economy can easily be realised.

According to hides and skin dealers, Uganda, on a daily basis, supplies about 100,000kg of raw hides and skin to the current seven tannery factories.

Heavy Texas steers advanced several dollars on good demand by under-bought tanners. However, producers who in many cases, sold the same hides more than once as the market was falling due to a lack of tanner performance, found themselves oversold recently. All other steer selections remained steady to the previous week. Export sales on 62/64lb were noted at $71 and $72 C&F. The cow sector remained weakly steady to lower for branded cows.

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