Don Ohsman’s view from the US - December 20165 December 2016
The latest news and views from the US leather market.
American hide prices have climbed since our October report. Benchmark heavy Texas steers that traded in late September at $73.00–$75.00 C&F led the upward movement, rising by mid-November to as high as $78.00. Heavy native steers found continued good demand, from Europe, as well as several Far Eastern countries. Prices, favoured mostly by automotive seat tanners, have risen by $1.50–2.00 in recent months. Butt-branded steers maintained their traditional $1–2 spread from natives.
Branded and heavy native cows also managed to trade more or less steadily throughout October and into the next month, with a little more stability trend towards the end of November. Throughout this period, slaughter remained very high, averaging over 600,000 a week (national holidays aside), which is 5% more than a year ago. As of mid-November, more than 1,265,000 hides were produced.
Exceptional profits, which have been running in and around $125–$150 a head for months, encouraged packers to kill as many cattle as their facilities and labour allowed. The expansion of the herd has enabled ample supplies of cattle, at prices that make meat attractive at the retail counter, as well as in the export market.
One example is National Beef Packing, the industry's fourth-largest beef processor. It reported a pre-tax income of $108.3 million, which is a record for any quarter. The earnings surpassed the net income of $84.8 million that the firm reported for its fiscal 2008 fourth quarter (June–August). The results gave National pre-tax income of $192.5 million for nine months, versus a $74.7 million loss for the same period last year. Other packers are also enjoying extremely high earnings
The October cattle on feed report said September placements were down 1.9%, while marketing's were up 5.5%.
The on-feed number is up 0.4% compared with last year. September placements totalled just over 1.9 million head, the fewest for any September since the USDA started this data series in 1996. September placements of cattle weighing 800lb or more were 3.1% below where they were in 2015. This was the first down month for placements since July 2014.
In an indication that heifer retention may be slowing a bit, the October report said the number of steers on feed was down 1.6%, but heifers were up 4.4% compared to 1 October 2015.
No US/Pacific collusion
Due to the decline and consolidation in steamship lines, especially covering the US/Pacific routes, the US Government did a study to ensure that remaining carriers did not fix ocean freight rates. The top US maritime regulator says the ongoing consolidation in the shipping industry isn't leading to collusion to fix rates. The comments from Federal Maritime Commission chairman Mario Cordero to the WSJ's Costas Paris mark the most explicit acknowledgment yet that regulators are navigating an uncharted and constantly changing landscape as the shipping business restructures amid unprecedented losses.
Some shipper-customers and regulators worry that the big alliances that are forming to share costs and risks across the carriers' big new ships are leading to secret deals to reinvigorate depressed freight rates.
Cordero says the FMC has seen “no major concerns with the alliances” and that the commission is able to “work it out” when it raises concerns with carriers. Regulators will almost certainly get to talk even more about alliances with the container lines. Cordero expects that, by next year, 14 of the world's 16 largest shipping companies will line up in one of three alliances.
Net sales of rawhides for the period ending 3 November were 414,000. This is up 1% from the previous week's 411,300. Two weeks previously, 546,500 were reported sold. Week 45's total was down 16% over the previous four-week average. For October, sales averaged 480,800 and for the year-to-date ending 31 October, sales averaged 388,533. Destinations were: China (286,900); Korea (74,100); Taiwan (25,700); Mexico (20,800); Vietnam (7,000) and Japan (4,300).
Outstanding raw hides sold, but not yet shipped, were 3,325,900. This is down 1% from last week's 3,368,100. Two weeks previously, 3,363,900 were outstanding.
Export shipments were 461,600 pieces. This is 13% above last week's 409,800. Two weeks ago, shipments totalled 365,000. October shipments averaged 441,625 and for the year-to-date ending 31 October, 375,200.
Wet-blue sales up
Net sales of wet-blue hides for the period ending 3 November were 230,100. This is down 13% from the previous week's 265,100. Two weeks previously, 35,600 were reported. Week 45's total was 4% above the previous four-week average. October weekly sales averaged 75,975 and for the year to date ending 31 October, 121,353. Destinations were: China (103,400); Italy (32,900); Vietnam (28,500); Mexico (27,800); Thailand (12,500); Hong Kong (10,600); Dominican Republic (9,400); Taiwan (2,700) and India (2,400).
Export shipments were 152,300. This is up from 117,600 the previous week. Two weeks before, 115,700 were reported, possibly due to catch-up inventory liquidations. For the month of October, shipments averaged 89,125 and for the ten months ending 31 October, 132,481. Outstanding sales of wet blue were 850,400. This is up 10% from the previous week's 772,600. Two weeks previously, 625,100 were outstanding.
Combined raw and wet-blue hides sold, but not yet shipped, totalled 4,176,300 pieces. This is incrementally above the previous week's 4,140,700. Two weeks previously, 3,989,000 were shipped.
Outstanding sales for October averaged 3,826,125 and for the 10 months ending 31 October, 3,381,324.
Combined wet-salted and wet-blue shipments for the period were 608,500. This was up 15% from the previous week's 527,400. About 400,700 were shipped two weeks previously.
For the month of October, combined shipments averaged 530,750. For the year-to-date ending 31 October, the average was 507,681.
Combined export sales for the period were 644,100. This compares with week 44's 676,400. This is up from week 43's 582,000, and sales of 665,600.
Adding an estimated domestic consumption of 35,000 to week 45's 644,100, the total becomes 679,100. Shipments for the like period were 608,500, and slaughter was 606,000.
Therefore, for one of the few times in 2016, combined export sales surpassed slaughter by 73,100, and shipments exceeded slaughter by 2,500 hides.
Net sales of wet-blue splits for the period were a negative 32,000lb.
This compares with a positive 240,300lb the previous week. Two weeks previously, sales were a negative 85,700lb.
Just over 41,000lb were cancelled, or adjusted, from Vietnam.
Shipments totalled 80,000lb. This is down from 290,700lb the previous week, and 578,200lb two weeks previously. Outstanding sales were 3,386,200lb.
This is down from 3,498,200lb for week 44, and for week 43, a total of 3,548,600lb were outstanding.
It's a global market
As can be seen in recent editions of the Hidenet European and Latin American market reports, buyers, especially Chinese, were active on European cows and various Brazilian selections.
Sources advise that this was largely due to a pick-up in furniture upholstery business in northern China, where a number of small tanners that had been reported closed were still operating in some way.
As tanners become more sophisticated, they are able to turn the proverbial sow's ear into a silk purse and therefore meet their customers' finished leather requirements. In many cases, this is accomplished with lower-grade – and therefore cheaper – raw material.
Because American steer prices are up 6% since early October, and prices for most types of leather have not increased, tanners who can do so, seek lower-cost raw material.
Brazilian and European hides were reasonably priced compared with US material and offer tanners better value, where applicable. Fortunately for domestic producers, American hide quality and available quantity are unique as a world supply origin, which explains the price structure now being seen.
However, for a number of tanners and their leather orders, cheaper origins – in some cases, combined with US material – will suffice, and will contribute to keeping a lid on where US prices are able to go if other origins do not advance proportionately.
As we go to press, a strong dollar against the RMB (and other currencies) has curtailed Chinese buying. The Yuan in eight years has made importing US hides that much more expensive for Chinese tanners.
To a lesser extent, Mexican tanners are also adversely affected. At the same time, leather prices are generally static, which has had a negative impact on Chinese buying and contributed to their lack of desire to pay steady prices compared with earlier in the month.
This will also make other origins than US hides more attractive to certain tanners, if they have applicable leather orders to fill.
Extracts from the Hidenet World Reports
The hide and skin market remained steady across African regions. South African Lamb, Central African lamb and sheep, and North African calves saw no change in price levels until the end of the month, when the latest prices show a drop.
In South Africa – an area noted for high-quality leathers suitable mainly for leather goods – the best selections lost $10 a dozen, as the lowest ones rose.
This confirms that the big names, which once concentrated on the top-end, are now buying lower-quality materials.
Argentina hide prices started October softer than the previous month, mainly due to weak demand in the domestic market. Prices (as well as demand) since then have remained unchanged, with Buenos Aires steers trading at $1.03–1.06 at the end of the month. Sources say that it is hard to make any predictions further than one month out, making all parties very cautious with inventory levels.
In September, 967,000 head were shipped for slaughter, a reduction of 8% compared with August, and 11% in annual terms. Between January and September 2016, nine million cattle were slaughtered, 8% below the same period accumulated in 2015. It was one of the three lowest records in the last 15 years.
During the week ending 11 November, cattle slaughter across the eastern states (excluding Western Australia) hit a 22-week high, at just under 134,000 head. While cattle slaughter has largely increased since it bottomed out in early October, kill rates remain below levels recorded over the last two years, with last week’s eastern states total 7% lower than the same time last year. Looking ahead, tight adult slaughter cattle supplies are expected to remain steady in 2017. MLA also reported that the country has nearly depleted its national cattle herd due record adult cattle slaughter in 2014 and 2015, along with recent issues with heavy rainfall in cattle regions. The herd dropped from a peak of 29.3 million head in 2012–13, to 26.2 million head this year.
In 2016, slaughter is expected to drop to 7.1 million head, which represents a decrease of 21% compared with 2015. In 2017, it is anticipated that slaughter will drop another 2% to 6.9 million head. MLA expects the cattle herd to return to normal levels in 2018.
Rawhide prices remained stable. In the short term, no increase was expected in the supply of animals for slaughter. For most of the month, wet blue, whole hides were trading at around $1.22/1.25ft CFR. The continuing devaluation of the real has caused tanners to lose money. Low slaughter has also led players to decrease production, with the exception of Minerva and Durli. In late October, JBS was running 22,000 heads a day, instead of 35,000. The generally quiet situation is expected to persist until the end of the year.
Brazil’s October leather exports grew 2.3% to $161.9 million. The CICB reported that the monthly balance sheet showed that the country sold to the foreign market $161.9 million ($3.6 million more than in October 2015). Compared to September, the increase was even greater: 7.4% growth in export values. The data are from the Bureau of Foreign Trade, Ministry of Development, Industry and Foreign Trade (MDIC), with calculation of the Business Intelligence Center of Tannery Industries of Brazil (CICB).
The analysis of October also reveals that the rise in export values was the opposite, down 9.7% compared with October 2015. Leather in finished and semi-finished forms already accounts for almost 70% of Brazilian sales to importers in 2016, registering this high period in export volumes of 12.2% and 84%, respectively.
Canada’s federally inspected slaughter for the week ending 5 November was 57,261, up 7% on the previous week. For the same week in 2015, slaughter was 51,710. Year-to-date Canadian cattle slaughter is 2,252,684. This represents an increase of 6.8% on 2015.
Chile produced 6,200t less beef in the first half of the year compared with the same period of 2015, which is a decrease of 5.3%. In cattle, the reduction was in steers, which in the first six months of the year saw a decline of 10.0%; among females, the slaughter of cows dropped 3.0%, while the heifer rate grew 4.7%. Chile saw a significant increase in beef exports, with Costa Rica being the main destination in volume and value, followed closely by China.
China celebrated its Golden Week holiday in early October, so markets were quiet, but trading was slightly more active than expected. By the end of the month, buying had increased, as had the prices being paid for top selections from the US. Prices in China for drop splits decreased for some origins, such as Turkey, Europe and the US. For example, in Week 40, prices for drop splits of 7–10kg from Turkey fell by 2,700 yuan.
In mid-November, Chinese buyers, especially, were active on European cows and various Brazilian selections. Sources advise that, in large part, this was due to a pick-up in furniture upholstery business in Northern China, where a number of small tanners, which reportedly had been closing, were still operating in some way.
Hidenet recently highlighted Ecuador, which has a long tradition of tanning, but its industry is focused on the local shoe and small leather goods market. Only a few tanneries export leather in wet blue or finished form because export of raw-salted hides is banned by the government. Hide availability is limited to 800,00-900,000 hides a year, which keeps prices high and not aligned with the international hide market.
The country has eight to ten working tanneries that buy and finish local hides (mainly Cebu type) as half-hides for the shoe industry. Only a few can produce whole hides, and only three have up-to-date facilities and technology.
Three or four tanneries can supply wet blue hides and splits to the international market. Prices in Ecuador are $1.15/kg for lower-quality coastal (Cebu) hides and $1.35/kg for higher-quality, Holstein-type hides from highland areas.
Hidenet’s Andrea Guolo recently surveyed the main European tannery groups on behalf of an Italian business newspaper. Asking what they expected turnover to be by the end of the year, he found that the main groups were growing, and thus showed higher performance than the industry average, which was expected to decrease by approximately 4–5% for reasons mostly related to the price of raw material. The industry was also being pulled along by the automotive sector, where the main Italian players continued to grow revenues and volumes. Some tanneries were expected to lose a little at year-end for competition reasons, or for referral in launching new models, but will still be within 3–4%.
In the stagnant luxury market, some tanneries saw an increase, while others lost revenue. The difference was always made by reference customers. Raw material prices tended to be stable as a consequence of uncertain demand. For luxury, it will be a year before a general restart can be expected, but in the meantime, it is unlikely that prices of some raw materials, such as calves, will decrease.
November saw calm relations with European tanneries, which maintained the trend of recent purchases. There was nothing new for bovines, except further cooling in demand for small calves. News was even more negative for sheepskins, which continued to lose appeal.
Things were much better on the export front, where the breaking news concerned China’s demand for small cows. Sizes of 26–28kg (from the Netherlands and France) were sold in Asia at $59–65 apiece, and some stores apparently ran out of hides. In Italy, the same categories in the lowest grades were exported at around $50–$52, with a peak of $55 for the best selections.
Europe maintains a good pace in automotive leather, and the actual numbers were set to grow, though not at the pace of the past two years. Competition between tanneries is extremely fierce, and Germans complained about the prices charged by some Italian vendors.
French calves are seeing much demand, with little supply. A generally satisfied market means that prices (€7.70–7.80/kg for the best skins at press time) are not expected to increase imminently.
Cow prices decreased significantly in late October. The Northern German was being offered at €1.42–1.45 (to be sold at €1.40, or even €1.38), due in part to a drop in furniture production and the abundance of dairy cows. Lower grades are suffering, including buffalo, which sell in the Arzignano market at $0.70–0.75/ft² for the smallest sizes. The good performance of the slaughter of the oldest cows complicates things. The situation will persist until the end of the year because the Chinese have many lower-priced alternatives, beginning with the UK.
The best southern German bulls are around €2.20/kg with very little success by sellers in obtaining €2.22, except some small lots. The top of the leather goods range is about €2.40–2.45 for French (Brittany) and Swiss origins.
Peak season for bulls runs from November to January/February. More hides will be offered to tanners, but prices should not fall because the automotive sector will see a further increase. Tanneries will have to continue to purchase heavy cows to keep up with the automotive sector.
In mid-November, the leather and hide trade was jolted by the government’s ban on R500 and R1,000 notes. Much of India’s agricultural sector runs on cash, and with the new monetary restrictions, meat processors had difficulties accessing enough cash to purchase cattle.
Many of them did not have enough stock to meet their usual slaughter numbers, which had the potential to cause a domestic shortage of hides in the short term. Sources say that global providers could have an opportunity to fulfil India’s hide needs until the economic situation stabilises.
Overall, India imported cowhide finished leather worth $486,772 under HS Code 41071900 with total quantity of 36,255. South Korea is the largest supplier of cowhide finished leather, accounting for imports worth $137,359, closely followed by China and Brazil, which exported cowhide finished leather worth $137,009 and $80,107 respectively.
Chennai Sea accounted for 41.8% of imports followed by Delhi Air Cargo and Tughlakabad, which accounted for 32.5% and 16.5% of imports respectively.
The average price of cowhide finished leather per unit is $13.43, and average value per shipment is $8,250.
Mutton and goat markets went downhill, with mutton skins selling at $65 a dozen, pickled. Medium goatskins were selling for $35–38 a dozen.
Ireland’s sales outside the EU in early November were being concluded at around €47–48 apiece. Resistance by foreign buyers simplified the task for British buyers, who suffered from the upward trend in prices for domestic hides. The mid-November price for Irish oxen at 36kg and up was up, at €1.60–1.70, delivered to North Italian tanneries on 30-day payment terms.
Arzignano, which accounts for around 60% of Italian production, saw difficulties with managing wastewater in October. Italy generates 65% of European and 20% of total global production, so this was a significant problem. By early November, Venetian tanneries were finally able to operate at full capacity for the first time since mid-July.
The production limits made buyers, such as Germany, exercise caution, with a block on some sources that departed from wet operations. Tuscany improved on a dire 2015, and encouraging signs came from Gucci and other luxury players.
By the middle of November, Italian veal skins at 18kg and up were selling slightly higher at €3.80–4.20 and those under that weight were steady at €3.60–3.90, delivered to North Italian tanneries on 30-day payment terms.
Unlike cows, bulls have not yet seen a restart of slaughter, so few skins were available, which allowed sellers to stand firm and reject downward counter-offers.
For cows, until China started its November buying spree, there were few sales, and flat prices. By mid-November, sizes of 26–28 kg, of origin in the Netherlands and France, have been sold in Asia at $59–65 a piece, and it seemed some stores appeared to run out of hides.
Veal skins saw little change from France and the Netherlands, so prices were up to a maximum of €7.70–7.80 for Crosier, the top luxury leather variety sold to French tanneries, with few offers.
Paraguay’s Chamber of Meat plans to open a sales office in China, a country with which it has no diplomatic relations. In Paraguay, bids for frigorigifico full substance TR1 were $1.28–1.32, Tr2 at $1.18–1.22 and Tr3 at $1.10. Low selections followed at prices that were considerably lower because there was a plentiful supply of this material. Automobile and upholstery were the strongest markets.
From January to September 2016, cattle slaughter dropped 2.1% compared with the same period last year, according to statistics of the Paraguayan Chamber of Carnes (CPC) and the National Service quality and Animal Health (Senacsa). Until the third quarter of this year, slaughter was 1,373 924 head, compared with 1,404,489 in January–September 2015. In addition, on 1 October, JBS launched its new frigorífico, bringing JBS to three plants in Paraguay.
The new facility will operate up to 1,500 head in its first stage, with a projection to reach 3,000. As the meat business continues to grow, the number of hides available will also increase.
Cow hides at 26–27kg were selling at €1.65/kg, delivered to northern Italian tanners on 30-day payment terms. Bulls at an average green weight of 40kg were trading at €2.25/kg on the same terms.
The US Department of Agriculture (USDA) released a report on the estimates of production of beef and pork in Russia for 2017. According to their estimates, bovine production will be reduced by 2%, mainly due to the fall of stock farmers, who are seeing a lack of investment in 2016.
Spain confirmed values around €10 for double-face entrefino, and up to 11 for merino. The prices quoted are FOB, euros per piece, with a 5.5-7ft range (6.5ft average).
There are fewer offers for the merino selection, which is curently out of season. In general, the good signs glimpsed in September seem to have vanished. Turkey is at a standstill, Russia is not buying and in China there is little work.
The Uruguay Weekly Cattle Report notes that the total number of animals slaughtered continues to be a surprise, some weeks in late October surged 14% over the same week in 2015.
An increase in the number of steers being slaughtered can be explained by the increased inflow of animals coming from feed-lots, thanks to agreements between the industry and producers.
The increase in the number of heifers slaughtered, meanwhile, is because producers would rather sell them now, while holding on to their steers. The hope is that the additional kilos packed on the steers will eventually be rewarded in a higher-price environment.
UK sellers concluded few deals in northern Italy in November. Prices of British oxen at 36kg and above peaked at the end of October with a high of £1.65/kg, with the near-certainty that sellers would not easily get the £1.70–1.75/kg requested. Small sizes, rarely sold in Europe, were destined for China and were sold around $50–$55 apiece.
Small sizes appeared to be in balance, and bigger sizes were also stable. The trend of the British pound, which strengthened against the dollar and euro after the outcome of the US election, hit its highest level of the previous month, which should favour buyers.
There was no good news for sheep, as British mutton prices again dropped to £1 a skin, without substantial distinctions between lambs and adult sheep.
In October, steer prices, led by heavy Texas, rose on balance 4–5%, while there were no measurable increases in shoe upper leather prices or any significant gains in leather sales volume. Split prices remained in the doldrums, and slaughter was at levels not seen for years. Robust slaughter numbers were anticipated to continue well into 2017, if not beyond.
Tanners would not be paying more for their hides if they did not need to cover against their recent and projected sales. Two other factors were the preferred seasonal gains available in the fall months, and tanners keeping inventories at sub-normal levels for fear of lower prices to come.
The market in early November was steady, with some small increases. Leather orders were better than they were the previous month, but not voluminous enough, and not at high enough prices for tanners to justify current hide prices. With tanner holiday closings ahead in the West for Christmas/New Year, and Asia’s long-term closures during its New Year celebrations, the market will have to wait for lower prices to cover current sales for delivery after holiday closings.
Mid-November’s Heavy Texas Steer prices were at $70.00–71.00 on 66–68lb. Exports sales of 66–68lb. Heavy Texas were reported at $76.00–78.00 C&F. Seasonal average wet-blue were quoted at $91.00–94.00 C&F.