Extracts from SauerReport

2 March 2009

Following the mostly negative news of the last weeks and reduced sales of raw material almost everywhere, more and more people ask themselves - where are all those hides?They continue to be produced as long as we eat meat and one does not need to have a university degree to figure out that if more hides keep coming in than are going out, they must be stockpiling.

A raid by internal revenue teams surprised many tanners/ traders in the Veneto area in North Italy in mid October. The story says the tax people are after VAT evasion, false invoices, smuggling etc on imports of hides from Brazil, South Africa and Australia.

One report suggests a fiscal fraud of around e15 million with 22 individuals/companies under investigation and three arrests made. The action is named Operation Dirty Leather.

In East Africa, no hide sales are reported, only claims and complications. Chinese buyers have pulled out of the market and are placing claims to lower their prices as if there is no tomorrow. Some firm contracts have been cancelled because buyers claim to have no money to pay for new arrivals.

As far as Kenya and Uganda are concerned, the Chinese market for hides seems to be dead at the moment. Two shippers from Uganda have shipped hides without orders and are stuck. Potential buyers in China are bidding less than US$1 per kg (for Uganda material - unbelievable!).

A Chinese trader reported that domestic demand for leather is ok but tanners are very cautious about the financial risks when selling, especially towards end of year. Lunar New Year will come early at the end of January. If tanners are willing to give credit, they can have more business. Leather prices within the country remain steady.

A few Chinese tanners have started to turn to European hides. Prices are down in Europe and the euro lost value against the US dollar. Some tanners have the import permit and experience and can take advantage of the cheaper European hides, while others who have neither an import permit nor the experience of handling European hides, can only look at the cheap prices and do nothing.

Almost every one spoken to commented that US steer hide prices need a major downward correction. So far US packers have done a good job not letting it happen. For cow and bull hides the story is different. Buyers are very few and prices reduced a lot.

Brazil is now a country for bargain hunters - and with a good chance of success. A buyer just has to find the most desperate exporter.

The low kill figures for cows and young animals make us believe the country is starting to rebuild its cattle herd after three years of cattle liquidation. Official slaughter for the season 2007/2008 is said to amount to 29 million head, down 5% from the previous season. With unregistered slaughter it is estimated another 9 million head can be added.

When the figures are split we see that the cow kill came down 11% to 10.2 million head. The kill of young ox and heifers reduced by 13% to four million head. Only the steer slaughter shows a small increase of 1.3%.

The tanning industry in Argentina is entering one of the most serious crises in recent history. Raw hides are not yet being burnt or buried but fresh hides, usually sold as such, are being salted because there are fewer takers than offers.

The phenomenal decrease in leather upholstery business both for cars and furniture and the relatively quiet shoe market has forced practically all the tanners to diminish production and suspend or fire a meaningful quantity of personnel. 25-30% inflation has eroded whatever margin of profit existed and the local market is entering a recession together with the rest of the world.

It is thought that raw hide prices are far from having reached the bottom and the possibility of salting them and stocking to await better times depends a lot on resolving the credit crunch.

In major Western consumer markets the recession is causing people to look for cheaper meat. In Australia demand for meat for fast food chains has increased while the demand for better meat decreased. This effect should not necessarily influence global kill figures but a shift from the better to the cheaper meat producing countries will have an equivalent shift in hide production.

The Aussie dollar costs only US$0.65 today while in mid July the rate peaked at US$0.985. This must make Australian hides and skins cheap for Asian buyers(provided prices in Australia remain the same).

In South Korea the won fell to a ten year low against the US$ and lost 35% of its value since the beginning of the year. Buying hides in US$ and selling leather in won does not work anymore. It is said the upholstery leather business has simply come to a stop in Korea. That would mean a lot fewer upholstery type hides are needed.

In New Zealand the old season has ended and the few skins still available find no takers. The new season officially began on October 1 but makes a very slow start. There is a lot of grass in the fields since the winter was very wet and there is more grass than the animals can eat. Slaughter will start late and slow.

The frigorificos on South Island will start operating with a month's delay at least. Farmers are keen to improve their poor results of last year caused by the drought (they are paid for their animals by weight!). This time they will do all they can to get them as fat and heavy as possible.

It is still expected that the 2008-2009 kill will show a strong drop of 6 million lambs (-25%) and even more (-40%) for sheep. The market for New Zealand leather is under pressure because of the suffering retail sales in the United States. The domestic Chinese market looks more promising.

For Germany, many of the very special heavy bull hides lost their few buyers from the Central European car leather tanning industry. It is now said that some of these tanners might even close down temporarily from mid December till mid January because of the reduced productions in the car industry.

Bad news also for the Swedish tanning industry is the decision by Volvo to reduce the number of workers by 3,000. This means they will produce a lot of cars less and need less leather as well.

Experts expect car sales in the US to drop by four million this year (from 16 to 12 million cars). That would mean a lot of upholstery type hides less are needed.

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