Brazil grows in importance

18 June 2005

Speaking at the 3rd Upholstery Leather Conference in Hong Kong, organised by Leather International, theSauerReport and Rizzi Pellami, Swirski said that: 'Some of the issues I will be touching on will repeat what I said during the 1st Conference in Barcelona, because they are still valid. Nevertheless, a lot has changed in Brazil and in our company in these two years so I hope that for the participants of the first conference I will not sound too repetitive. Brazilian hide production Brazil, as you all know, is a country of continental proportions, with plenty of fertile soil and as of 2002 had a cattle population estimated at 179 million head, up from 155 million in 1997 - an increase of about 15%, almost 3% per year. The estimated yearly slaughter for 2004 was about 40 million head (up from 29 million in 1997 - an increase of about 38%, almost 5% per year, reflecting also the improvement in yield). Today, Brazil has jumped over Australia to the first position as meat exporter. Since the percentage of slaughter vs cattle population is also growing, the tendency is towards increasing the hide supply, against a rather stagnant hide supply elsewhere. Thus, Brazil is growing in importance as a leather supplier. China, India, the United States and Brazil, each responsible today for between 11 and 13% of world production, are together producing almost 50% of all the hides available in the world. Brazilian leather industry Statistical data The following statistical data for 2004, will give you an idea of the Brazilian leather industry, in millions of hides and in percentage: million % Production of hides 39.9 94.3 Import of hides 2.4 5.7 Total available 42.3 100 Exported salted 0.2 0.5 Exported in wet-blue 15.8 37.4 Exported in crust 2.6 6.1 Exported finished 7.7 18.2 Total 26.1 62.2 Exported as leathergoods 10.0 23.6 The increase was mainly absorbed by the increased export of wet-blue hides. This tendency is likely to change slowly in favour of more exports of crust and finished hides. One cautionary remark: the export of crust as reflected in the statistics is low in our opinion, how much higher the real export levels are we do not venture to say. Breakup by leather products We do not have reliable statistical data regarding this aspect. We estimate that 70% of the export of wet-blue hides goes to upholstery. The export of crust leather, which is rather small, probably also goes about 70% to upholstery, mostly for furniture. The finished leather goes mainly to the shoe and leathergoods market. Pricing of raw hides and finished leather Let us make a few comments on the peculiarities of the rawhide trade in Brazil; just to give you a feeling of how difficult our business is. The growing offer of raw hides is still compensated for by ever increasing availability of tanning capacity, thus maintaining a sellers market. Because of this, the big packers succeeded in imposing a very advantageous system (advantageous for them) of weekly price fixing. They usually sell the slaughter of each day to different tanners, thus maintaining a keen competition between the different buyers. Eventually some may sell the production of two or three days to the same tanner but very rarely the whole production to only one tanner. Our situation seems to be different because about 40% of our purchases are intra-company. It only seems to be different, since we have to keep up with the general market and our colleagues at our own packer plants are not easy to deal with. In Argentina, just for the sake of comparison, the hides are negotiated on a monthly basis and assigned to only one buyer with a fixed price, although lately there are deviations to a more flexible system. Since at the other end, selling crust or finished leather, frequently we have to close long term contracts at fixed prices, well in advance. We are always running an important market risk compounded by the known instability of our South American countries. Right now we are facing a revaluation of the local currency making our operating costs more expensive in dollars. Brazilian upholstery leather industry Whilst the export of upholstery leather for furniture is important, Brazil is still a minor player in the automotive leather industry. In the local market, we estimate about 500,000 sq m of automotive leather is sold directly to the car manufacturers. The important market is the after-market where an estimated 8 million sq m are consumed, only partially automotive leather, the remainder being destined for upholstery leather that is cheaper but most buyers will only learn the difference after some years of wear and tear. These estimated 8 million sq m are mere guesswork since it is almost impossible to obtain reliable data from the many small outfits that produce and sell the seats to final users. Future Now, going over to the prospects, we think that upholstery, especially the automotive sector, will no doubt grow heavily in the future, due to the increase in world demand for leather upholstery. Since the offer of hides worldwide is stagnant, Brazilian leather will find buyers in all segments. It is interesting to note that when the upholstery market first grew strongly, buyers started looking towards Brazil which had been neglected in the past because of the lower grain quality and the hump of our Zebu type cattle. Now, automotive leather buyers consider the Brazilian market to be very important. We deem it impossible to make any estimate of volume but no doubt the sector will, given time, absorb an important percentage of the total leather production. The advantage of Brazilian hides for upholstery leather is that although most hides present humps resulting in holes in the finished leather, the large average size of Central Brazilian hides compensates for the loss. Selection and grain is inferior to several other origins where the upholstery industry started buying hides. This makes our hides less attractive for full grain aniline leather, for instance for ladies' shoe production and, thus, more competitive. The larger grain is not a problem since even full grain upholstery leather is mostly pigmented, printed and milled and, of course, the biggest market is for buffed and stuccoed leather. Cutting and sewing Due to cheap labour in Brazil, together with the local availability of the adequate raw material, we foresee that Brazil will be increasingly important in the cutting of leather seats for the automotive industry and cut and sewing parts and cushions for the furniture upholstery industry, for local consumption as well as for export. In fact this process is already taking place in the upholstery sector and is beginning in the automotive upholstery sector. Conclusion Looking out to this very interesting world with so many new developments, we feel that we Brazilians have a privileged position in the leather industry in general and will put great effort into participating in a meaningful way in the growing segment of upholstery leather. There are already a few but important tanneries that are able to supply this market satisfactorily in terms of quality and quantity, Bracol being one of them. Present and future of Bertin Today Bracol are producing almost 3.6 million hides a year, from fresh to wet-blue, crust and finished. This represents about 9% of the total offer of hides in Brazil. In 2007 we will produce 5.5 million hides. We limit our activity to the area of Central and North Brazil where the best hides are being generated and, thus, our share in this area is much higher. About 40% of our hide supply comes from our own slaughter. Investments have been made to achieve 10,000 head/day within the next year. Foreseeing these developments, we have been directing our efforts towards increasing our production for the upholstery industry. Thanks to our association, since 1997, with the Rino Mastrotto Group in the Bermas plant in Fortaleza, we are already well placed in the finishing and cutting of upholstery leather. Besides, we are selling furniture upholstery mainly to Italy and lately also to China. The automotive upholstery area of Bracol is developing at a rapid pace thanks to our working association with Eagle Ottawa which began in 2003. Our production of upholstery leather, both for automotive and for furniture, today represents about 30% of our total crust production, and will grow in the future. Keeping pace with the ever growing demand from China, we have also developed our setup in China to finish leather for shoe uppers and bags in collaboration with the Ever Rite group. We expect to direct a growing percentage of our production of upholstery leather to this market.

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