A mosaic of different realities25 April 2004
Reporting today on a market's situation, an industrial sector, it is impossible if we don't bear in mind the very complex reality such as that raised by the world economy and its currencies. The devaluation of the dollar versus the euro is producing conflict and benefit zones because, given the current world situation, it affects every region. While the US is working to reduce its huge commercial deficit, stimulating exports and reducing the cost of imports, the current situation, in terms of fiscal and commercial deficit, unemployment, security and other hot matters, is making all world economy operators nervous. How are weaker structures such as the Latin American economies, with huge debts and dependent on the good will of Washington, going to be in good shape? The region of Latin America, regardless of their dependence on the dollar, is not benefiting from the situation despite most of their trade being developed with their northern neighbour. The economy in most of these countries is not a bed of roses. The changes which occurred during the nineties left Latin America, according to reports from the World Bank, as the region with the most unequal distribution: 10% of the population holds the 50% of generated wealth and more than 50% of the population is under the poverty line. A large part of the US productive capital has moved to the south-east Asian coast, attracted by the advantageous conditions offered by the strong regional governments. As is well known, due to the growth of that region, highly superior to Latin America's, the companies found their ideal spot for production at very cheap labour costs. These large productions expanded worldwide, generating at a low cost, critical situations for the economies of many countries. After the nineties, Latin America's reality finds itself weakened by a shaming reality: smuggling. From south to north, claims from the local industries and their associations are heard, along with illicit evidence. Sometimes governments remain impotent and at other times there is virtual complicity - either due to action or no action - with attitudes that are far from honest or legal. Manufacturing industries accuse customs and put pressure on governments to prohibit the illegal access of products that are not paying duties or are only paying a very small percentage, while the local taxes are suffocating the industries in the region. But there is another factor affecting the chances of productivity in the area and this is the policy regarding currency appreciation versus the dollar which was applied by most countries during the last decade. Production costs in dollars made them less competitive in international markets as well as in their domestic markets. This made them fail in their fight against illegal imports and, moreover, against smuggling. Some say these operations are only understood if analysed as 'money laundering' actions, protected by offshore places and banks, which have already caused a closer monitoring on some governments. ALCA: Free trade agreement for the Americas In their aim to expand their market and compete with the enlarged European Union, the US has concentrated its strategy in the region by pushing for the signing of a Free Trade Agreement for the Americas, ALCA. This agreement will be effective from 2005. The conditions and the protectionist US policy to be implemented have been generating mistrust from the 33 countries that should go along with it. Most countries have rejected the suggestion that it is the companies' capital what will determine the nationality of the product. They know that US companies will then introduce their products, made for a low cost in Asia, and end up destroying even more jobs, making poverty and exclusion from society worse in their countries. Also, there are many other points in the agreement which they consider unacceptable. But, the 'fracas' of Cancun and many other preparation meetings of ALCA in the recent months have led to some lessons. The automatic alignment of Latin America with the US policies has started to crack and this country will have to make a fairer offer if it wants to succeed. On the other hand, the US hold the ATPA agreement with another four countries from the Andean region or 'Ley de Preferencias Arancelarias Andinas'. Through this law, the US gave preferential customs treatment to more than 6,100 products from Colombia, Ecuador, Bolivia and Peru to access that market, free from customs duties for ten years from 1991. The same was extended in August 2002 until December 31, 2006, under the name of 'Preferencias Arancelarias Andinas y de Erradicación de Drogas' (APTDEA). As the expansion went on, products from former ATPA continued to be covered and new products were included such as footwear and leather manufactured goods, among others. In the past, these products entered the US and Puerto Rico with an average customs duty of between 8% and 17%. Today, it is zero. This has increased the hope among the industries in these countries. Just as a reminder, Latin America has a total of 340 million head of cattle and produces 1,530 tonnes of hides and skins per year. This figure represents 35% of the worldwide production. Let's see what happened in some of the countries in the region during the recent times. Brazil The largest country in the region continues to increase its cattle herd, basically 'zebu', with almost 175 million head. The slaughter in 2003 was approximately 35.5 million units. 40% of skins are produced in the domestic market - in many cases exported as footwear and upholstery - and 60% are exported. After the pressure from the livestock and slaughterhouse sectors, the government has decided that soon the export tax of wet-blue hides, which was 9%, will fall in 2004 to 7%, 5% in 2005 and will disappear in the following year. The tax on exports of hides with a low level of treatment allowed the leather industry in Brazil to increase exports of finished leather by 230% between 2000 and 2003. The prevailing argument was that due to the international crisis, the powerful footwear industry - third largest producer in the world - did not gain any increase in leather footwear sales. The slaughterhouses have assured tanners that the slaughter rate will not leave the leather and footwear industries short of supplies as in previous years. But this argument has not taken into account that the growth in leather sales with a higher added-value has produced many more dollars for the state and has generated many more jobs in a country with an overwhelming unemployment rate. Many tanneries have resigned themselves to producing wet-blue only. They have to compete with other high-quality finished leather tanners that also produce upholstery leather. According to market analyst Roberto Saban: 'The elimination of the wet-blue tax will, perhaps, delay the progress of the manufacturing sector in Brazil but the importance of having a supply place near the semi-finished manufacturing spots, such as cutting and stitching panels for both the furniture and automotive sectors, is continuously increasing in the industry.' 2003 was a good year for Brazil's exports. The value of the real against the dollar was beneficial for the industry and there was progress in expanding into new markets. For example, an excellent niche was found in some Asian countries: Hong Kong, China, Singapore and Taiwan, which represents nearly half of their exports. And, in this case, most of the sales are finished leather. On the other hand, the footwear sector will most probably recover in 2004 given the improvement of the north American consumer market. Paraguay Neighbouring country and close to Brazil in many aspects, Paraguay experienced problems in monetary matters. The guarani has been appreciating in value and this caused a lower chance of profitability for the leather sector. Changes started in the second semester when the exchange rate for the dollar went from 8,000 to 6,000 guaranties. The strong dollar forced the abattoirs to reduce the price of their raw hides from US$0.70-0.75 per kilo to $0.60-0.65 per kilo by the end of the year. Paraguay has a cattle herd of eight million head approximately, breeding mostly zebu in the capital region, Asuncion, and European breeds in the Chaco central region. Due to foot and mouth in the middle of the year, Paraguay suffered a strong decline in meat exports and a consequent fall in slaughter as there was only work for the domestic market of six million habitants. Towards the end of the year, meat exports have slowly recovered some of their destinations and refrigeration plants have begun to work better. Smuggling of skins to Brazil was very strong until the incidence of foot and mouth. Except for a small portion of skins directed to the domestic market, Paraguay tanneries produce wet-blue, semi-finished for footwear and splits, essentially sold to Italy, Argentina and Asia Pacific, with increasing buyers from China. Chile The appreciation of the Chilean peso has been important since the third quarter of 2003. The inflow of currency into the country due to fruit exports or financial investments caused the peso to appreciate. This phenomenon, together with the low tax rate for imports held by the country, reduced the amount of leather manufacturing companies to the minimum. The international price of raw hides increased and only the abattoirs operated successfully, in transactions of salted hides to Uruguay. At the end of December, fresh raw hides were being sold at US$1.14 per kg. This reduced the possibilities for the leather sector which is already limited to a few companies. These continue to sell wet-blue, especially to Italy, China and Brazil, and finished leather for footwear to Mexico. Chile holds a cattle stock of 4.1 million head. Uruguay The Uruguayan leather industry accounts for exports of almost exclusively finished leather, very little semi-processed and almost no wet-blue. With a great level of commercialisation at the main tanneries, these companies have achieved this through the use of imported skins (Brazilian and Argentinean) and good management with very good value resale rates in the upholstery sector, both in finished leather and manufactured goods. They have performed very well with imports of Argentinean leather and have obtained good value with their finished merchandise. Additionally, they are entering European markets for automotive upholstery. Some have added upholstery manufacture for cars and work in association with automotive producers such as Peugeot, BMW or Volvo, selling ready-made kits. With regard to sheep leather, this was very important some time ago but is now down. The strong dollar did not help but high competition and quality of the product were enough reasons to open markets. In 2003 Uruguay held a stock of 11.7 million head of cattle and a further 9.8 million sheep. Argentina In recent years, the Argentinean leather industry has been evaluating wet hides in a more selective way, as companies are becoming more and more specialised in particular items. In 2003, there was a decrease in the 'wet' activity during the first half of the year leading to a 40% capacity increase which was then lowered to 20% in the last quarter. This year, new players have joined the market. Two production plants, managed by other operators, were added. One had been closed for two years and the other had been recycled by an important European company. Due to the reorganisation of the domestic market and certain niche exports, a number of medium tanners who, until then, did not have an important presence joined the scene. Estimated figures are around 10,000 hides per week. There has been a sustained growth in terms of manufacturing production. With regard to cutting and stitching, most examples are production plants set up by the tanneries themselves. Other areas with good performance were saddlery, belt making and the leathergoods sectors, which started to deploy a strategy based on participation at the Asia Pacific Leather Fair in Hong Kong. The pet product sector had an excellent performance in exports, particularly to the US. The cattle stock in Argentina is just over 50 million head. Foot and mouth during 2001/2002 affected meat exports and the domestic crisis considerably lowered internal consumption. This is now recovering, reaching 65 kilos per year per capita. Also, the cultivation system of the past decade, with its high revenue returns, has led to greater qualities of pasture leading to investments in agriculture, especially livestock. The lack of hides is leading large Argentinean tanneries to face imports which are growing every day. These are sourced from Paraguay, Brazil and the UK, among others, especially when competing in the US market with upholstery leather from China. Venezuela The activity of tanneries in Venezuela has been severely hit by industrial and commercial unemployment which, combined with 'sabotage' to oil facilities, ports and petrol stations, paralysed the country between December 2002 and January 2003. According to a report from Richard Smith, published on CueroAmerica.com, one of the first effects was the progressive decline in raw materials and chemical products, followed by a fall in production. Government regulations, effective from January 17, which included the implementation of a fixed exchange rate of 1,600 bolivares per US dollar and a strict programme on exchange control, meant that companies lacked disposable dollars to import chemical products. Their options were to source from existing stocks in the country or to import using currency that had been deposited overseas, with the risk that it could not be exchanged into dollars once transformed in imported products. Also, the value of chemical products increased by 60%, as both the producers and the local suppliers adjusted their prices according to the 'black currency market', which had been around Bs/US$2,500-2,600 that year. Also, Colombian buyers started to offer dollars on the black market of Cúcuta (on the border between both countries) at Bs/US$2,500 in return for the salted hides from Venezuela. As the local tanneries were operating in bolívares, the slaughterhouses put up the price of their salted hides by about 60%, leaving the local tanneries out of the national and international competition. According to Smith, with the new foreign trade regulations, all dollars obtained from exports have to be repatriated and sold in the National Bank of Venezuela at Bs/US$1,600 . Therefore, the local tanners could not buy supplies at 2,500 and sell their products at 1,600. This resulted in the almost complete suspension of leather exports, which in the last five years had been mostly wet-blue to Italy. Therefore, the only market that remained open was the local footwear manufacturing. However, difficulties also arose here. The companies' management strike at the end of 2002 caused around 400,000 new unemployed people and inflation increased considerably in the first six months of the year. As a result, the footwear purchases decreased at least by 40% in the first four months of the year. Additionally, tanneries had to transfer the increase of 60% in the production costs to the final consumer. This meant that the average price for a pair of quality leather shoes amounted to 30% of the minimum salary. Venezuela has a cattle stock of 18 million heads. Peru Peru has a cattle livestock population of 4.5 million head (most living in pasture) and the average age for slaughter is more than three years old. It also has 13.3 million sheep. In a report by Carlos Díez Gallo, managing director of the Peruvian Footwear Association (Cámara de Calzado, Cuero y Afines) and co-director of the quality improvement project for leather, he maintains that slaughter and preservation of skins in the country is inadequate. Initially the project has been carried out only on sheepskins. Raw material prices for cattle hides are worth 20% less in Peru than similar raw material from the US. The are only two tanneries with a production of more than a thousand hides per day, as the majority are small and micro companies. According to Díez Gallo: 'Machinery and equipment are generally out of date, there is inefficiency in operation and product development is very poor.' Peru does not implement any protection policy on hide exports without added value. As a result, a great part of hides are exported salted or wet-blue to markets such as Italy, Colombia, Chile and Mexico. This was translated into four thousand jobs less in the leather industry during the recent years. One of the biggest problems affecting the tanning and footwear industries is the massive imports of footwear from overseas. A large proportion of it is illegal and hits the whole leather supply chain. Both the leather and footwear sectors are automated, greatly influenced by the micro and small company as well as the hand crafted market. There are also more than twenty trade associations. Despite their active effort focused on protection and improvement of the industry, they have not succeeded in raising the government awareness. Data from Peru, as from the rest of Latin America, shows poverty in most of the population which when buying footwear can only choose the lowest quality products made in Asia. Colombia During the last decade of the past century, the leather and manufacturing chain in Colombia suffered great changes. In 1991, exports were US$274.3 million as opposed to US$9.4 million imports. In 2002, exports were US$162.4 million versus US$107 million for imports. This gave a variation ratio of around 29 times in 1991 compared with only 1.5 times in 2002, illustrating the decline in exports and the rise in imports. Exports decreased by 41% whereas imports increased 1,030%. The country started an economic expansion leaving behind industrial development policy. This quick expansive and open policy of the government has accelerated the decline in the leather sector and its product. The Colombian industry needs to face certain issues such as poor infrastructure like roads, ports and customs, among others, high service costs; technical and 'open' smuggling which has become one of the biggest problems in the chain; informality and an armed conflict which generates difficulties of a diverse aspect and mean a higher operational cost for the companies. The most affected sector has been footwear, going from US$107 million exports to US$27 million in 2002, while imports from US$2.1 million went up to US$75 million in 2002. Exports were reduced by 74.7% and imports increased 3,471%. The second most affected sector was leathergoods, as exports fell from US$134 million to US$46.9 million (-65%), whereas imports increased from US$1.5 to US$22.3 million (up 1387%). Exports in the tanning sector rose from US$32.9 million to US$88.4 million (169% growth), while imports of US$5.7 million increased to US$10.6 million (86% growth). However, the sector went from processing finished leather for local product industries to exporting mainly wet-blue hides. These have increased year-on-year, hence from the total slaughter in 1998 exports represented 4.4%. This figure increased to 34.1% in 2003. In many cases the lack of capital leads the tanneries to process the hides for third parties who then export them. Leathergoods and footwear exports have improved notably during 2003 to markets such as Ecuador, the US, Mexico and Peru, which is reflected in larger quantities but lower unit prices. A clear example is leathergoods, where there was a 30% increase in quantity and 11.5% decrease in value. However, the local market continues being down as it is thought that incoming products enter the market through open smuggling.