Don Ohsman’s view from the US

Unparalleled, amazing and unimaginable are just a few words that might best describe the US hide market since the APLF in late March in Hong Kong, and especially since the last Hidenet report.

In the 50 years that I've been watching hide prices, the drastic drops seen in recent weeks were historic and surprised even the most bearish observers.

Benchmark heavy Texas steers along with branded steers, which together comprise 75-85% of US production, tumbled from $74-75 in mid-June to $60-62 in mid-July. That's 17% in just four weeks; with the largest drop taking place the week of 6 July. This means that sales in the first weeks of July on these two predominant steer selections sold by traders were booked as low as $65 C&F and up to $68 on slightly higher averages. Wet-blue heavy Texas were reported as low as $84 C&F recently.

The cow sector was also not immune; branded cows that were trading at $54 FOB a month ago were $10 cheaper when we went to press. Holstein dairy cows fell from $67-68 to $55-56 in the same time frame, an 18% drop.

All of this has occurred when slaughter numbers in the US are at a historic low. So far this year, kills are running 7% below 2014, which was more than 3% below 2013.

APLF: all downhill from here

During APLF in Hong Kong in late March, (Texas had fallen to 'only' $102 FOB) the phrase 'design it out' was repeated, which was made a year earlier when US steers exceeded $110. Footwear producers and makers of other leather products simply took leather out of their designs in order to meet retail price points. Hides and leather priced themselves out of competition for retail shelf space. Even though far more substitutes were blended in than ever before, there were not any consumer complaints nor awareness of what had taken place.

In the meantime, weekly USDA export numbers show that hide and wet-blue sales are still running at a rate of 450,000-500,000 a week while, at the same time, slaughter is running at around 550,000 a week - so sales are almost keeping up with hide supply.

There are several main reasons why prices are crashing. First is that previous export sales, many dollars above recent prices, are not being paid for primarily by Asian buyers, and more specifically Chinese tanners who buy the bulk of US production. This means that hide producers and traders have been forced to renegotiate higher priced contracts and/or, in the case of buyer cancellations, resell the same hides, too frequently, more than once. The end result is that producers, as well as traders, who thought that their forward-sold position was adequate, if not quite normal, found themselves struggling to move all of the hides being made each week.

The matter at hand

In response to a media question recently about contract integrity in the current market, the US Hide, Skin and Leather Association (USHSLA) replied that it is astounded by the complete disregard of contractual obligations by many tanners during these dynamic market conditions. This is not an isolated incident. Small leather producers and large publicly traded corporations are engaging in these disreputable actions. It is a systemic problem that plagues the industry and will inevitably affect downstream consumers of leather, including footwear, accessory and upholstery manufacturers.

USHSLA said it continues to work proactively with its colleagues in China Leather Industry Association (CLIA) and International Council of Hides, Skins and Leather Traders Association (ICHSLTA) to address this problem. However, all options remain on the table with regard to protecting the legitimate interests of the US hides and skins industry.

Going forward, the association said it will be exploring options for legal recourse and additional protection for its members in domestic and foreign jurisdictions.

So where is the bottom? What fundamentals need to change to stop the fastest decline in US prices in memory and, probably, in history? Will leather ever regain its market share? Yes, but not in the near future as product manufactures cannot revamp their lines just because leather prices have again become reasonable. Substitutes are not going to disappear anytime soon, and when the current market crash eventually comes to an end, even if there is a bounce of some sort, steer prices, for example, are destined to stay in a $50-70 range for quite some time to come.