International Leather Forum in Sao Paolo

LEATHER

International Leather Forum in Sao Paolo

by FNA posted on 29 Jan 2010

Richard Smith reports from Sao Paolo

L to R Don Ohsman Miguel Galperin Wolgang Goerlich Paul Pearson Gustavo Quijano MIchael Duck

Organized by the Brazilian Tannery Association (CICB) and supported by the Brazilian Export Promotion Agency (APEX) the International Leather Forum was held on January 20th at 2.30pm at the Couromoda fairgrounds.

This was the third such forum to be held since March 2009 after the inaugural event in Hong Kong during APLF MM&T 2009 and the follow-up round table at ACLE 2009 in Shanghai. Considering Brazil’s importance as a major leather supplier on a global basis it was fitting for this forum to be held in Sao Paolo.

The panel of experts changed slightly from the original one published by the CICB. Here is a photo of the panel’s names as shown by video bean at the start of the forum:

• Wolfgang Goerlich is President of the CICB - Brazil

• Donald Ohsman – Hidenet USA

• Paul Pearson – Secretary of the International Tanners Council (ICT) - UK

• Miguel Galperin – Director Industrial Operations &Sourcing of SADESA _ Argentina

• Gustavo Quijano – Executive Director of the Confederation of European Union Tanneries

• Michael Duck - Senior Vice President UBM Asia Ltd. and Director of APLF - Hong Kong and ACLE – Shanghai

Panel List

After Mr. Goerlich’s introduction Don Ohsman gave a summary of what had happened to the international hide market during and after the collapse of prices began in September 2008.

Contracts were broken as hides arrived at their destination three months later with prices around US$30 after they had been purchased at US$ 65 – US$70. Upon delivery buyers were asking for discounts to compensate for the fall in price and sometimes containers just sat in port.

However, in May 2009 many tanneries were obliged to restock if they wanted to continue operations as inventories had fallen in anticipation of lack in demand and as tannery operations were wound down.

Don Ohsman

Dow Jones Index

Mr. Ohsman presented a chart of the Dow Jones Index which coincided with the collapse and recovery of the hide market.

Restocking forced the hide market to bottom out and prices started to rise in May/June 2009. Mr. Ohsman noted that slaughter in the US had declined by 5% in 2009 and could decline by a similar percentage in 2010. If hide prices rise as slaughter falls in both the US and Brazil, this could open the door for an increase in synthetics usage. He anticipates an economic recovery in 2010 and demand for finished goods should increase as the recovery sparks what he termed a “trickle down effect”: Based on these factors he anticipates that hide prices could vary by +/- 10% during 2010.

The next presenter who had a double role to play was Paul Pearson. In the absence of the President of the ICT, Madam Zhang, Mr. Pearson read out a statistical report he had received from the China Leather Industry Association (CLIA) which was extremely dry to put it mildly after Mr. Ohsman’s dynamic presentation. All the facts Mr. Pearson read out can be found on the CLIA web site .

The key facts Mr. Pearson mentioned were that China has around 16,000 businesses in the leather industry with some 5 million employees. Total turnover in 2008 was US$83 billion; exports in the same year were US$42.8 billion and imports US$5.5 billion, of which finished leather amounted to US$2.7 billion. However, the crisis in the sector was reflected in the 2009 results with finished leather imports falling to just US$1.7 billion and overall imports down to US$3.7 billion.

Paul Pearson

For Mr. Pearson the main challenge facing the tanning industry in China is the new policy of building tannery clusters with common recycling plants to protect the environment. Chemical processes will have to use “friendly” chemicals and mainly due to environmental and health concerns some 4,000 smaller production units were closed in 2007/2008.

Tannery clusters are seen as the panacea for the free-for-all which was China not so long ago and in the next five years 5 – 8 new tannery clusters are planned to be built.

Others challenges lying ahead for the Chinese leather industry are to reduce the number of imports to feed tannery production which is currently running at 50% and then, on the commercial side, to tackle the issue of EU punitive taxes which will obviously affect footwear exports.

In his own presentation Mr. Pearson concentrated on giving an overview of the industry. For example, in developed countries he expected developments and activity to be basically static in 2010 with increased activity in what he termed underdeveloped countries.

Leather production as a whole is used 52% in footwear, 10% in garments and 10% in upholstery. The auto sector will be increasingly important in 2010 but he predicted that about half the leather dedicated for car upholstery would not be used in 2010. In 2009 US car sales, until 2008 the largest market, were down by 40% which is an awful lot of leather and even though he expects car sales in the US to pick up this year, it is mainly the BRIC countries (Brazil, Russia, India and China) which will show the main increase in sales and hence the most increase in leather usage.

The next speaker was CICB President Wolfgang Goerlich who gave a thorough presentation about the state of the Brazilian leather sector after what was a very tough year in 2009 with exports falling significantly.

With many large hides available much Brazilian leather was being sent to the automotive sector and with the sharp collapse of sales in Europe and the US, Brazilian exports suffered throughout the year. Production of leather fell from October 2008 until the end of 2009.

In 2009 major developments took place on company level with the formation of new groups and alliances.

Wolfgang Goerlich

The JBS group is now the largest meat packer and tannery group in the world and Mafrig, after buying a 51% stake in Zenda Leather of Uruguay, is now the fourth largest group.

Mr. Goerlich indicated that most business is being done outside Brazil and he did not envisage many new farms being created in the country due to high production costs. The slaughter index (percentage of cattle slaughtered vs. herd size) is currently running at between 22%/23% and if more meat is to be produced and exported this index has to rise.

The Brazilian bovine herd has declined by around 12 million animals since 2006/2007 to just over 191 million with 38 million animals expected to be slaughtered in 2010, hence producing the same number of hides. However, after the crisis of 2009, between 5 to 8 million hides were left in stock resulting in a total supply of some 43 to 46 million hides. Since tanneries purchased many of them to take advantage of rock bottom prices earlier in 2009, this now means that inventories are very low.

Demand for hides in Brazil could grow to 20 million if manufacturing activity holds up which will enable some 24/26 million hides to be exported.

Evolution of bovine herd in Brazil

Wet blue hides represented the highest percentage of Brazilian leather exports despite a 9% export tax and wafer thin profit margins. In 2008 wet blue was 35% of total exports and in 2009 40%. However, the strength of the real against the US dollar meant that the value of exports declined in local monetary terms by 35% due to the unfavorable exchange rate for exporters.

Brazil’s main export markets for all types of leather are China (50.5%) and Italy (37%)

Mr Goerlich expects the total kill to decline in 2010 to around 29 million head. Since the industry is now in fewer hands after the mergers mentioned earlier the kill could be limited to just 29 million animals which should force prices up as the supply/demand balance is tipped. This will oblige tanneries to specialize more in certain types and quality of leather.

Mr. Goerlich concluded by forecasting that leather exports would be around US$1.45 billion in 2010 which is 28% above the 2009 figure but well below the record of US$2.45 billion in 2007. He expects sharp competition between the main groups as they battle for market share.

Sadesa’s Miguel Gaplerin continued the presentations with a concise overview of the scenario in neighboring Argentina. After reaching an interim high of some 62.3 million animals in 2006, destocking had occurred in the countryside with Argentina’s total herd size down to 52.3 million head from 61 million. In the same period slaughter was up by 16% which explains the fall in animal numbers. The record drought which forced many cattle ranchers to slaughter weakened animals also helped increase the kill in 2009 which led to destocking.

Meat consumption in Argentina is the highest in the world with 70 kg per capita consumption per year. It is government policy to control meat prices so that this staple food is accessible to everyone and this in effect limits exports.

Miguel Gaplerin

The tannery sector is comprised of some 120 tanneries of all sizes with a tanning capacity of 16 million hides per year. Mr. Galperin pointed out that 77% of exports are realized by the major tanners most of which are members of the local Tannery Association, the CICA.

In 2009 exports fell sharply and in the months from February to June the whole industry almost ground to a halt. It was feared that many tanneries would not survive as sales were stagnant and huge inventories of hides and leather built up affecting cash flow and endangering the payment chain.

Mr. Galperin explained that the turnaround started in June 2009 as the government pumped money into the sector to stimulate it and prevented even more tannery operatives from being laid off by paying A$600 per month to subsidize jobs. Retail discounts at the sharp end also stimulated demand. Tanneries became accustomed to a lower level of activity

For 2010 Mr. Galperin expects better volumes as inventories are still relatively low. This will mean that raw material prices could veer to the high side but margins will still be tight for the foreseeable future.

Representing Cotance Gustavo Quijano’s presentation was centered on the way in which the leather industry could better face the future in terms of dealing with environmental and ecological regulations which seem to be imminent and unavoidable. As Mr. Quijano observed, environmental concerns are now higher up in public perception as an important issue even though eco labeling is still voluntary.

The globalization of the leather industry has not ended protectionism according to Mr. Quijano. Only 40% of raw materials move freely meaning that 60% are still subject to some form of duties or import restrictions. Initiatives such as REACH have not been researched properly and have thus become a hindrance to the industry rather than a real help to the environment in protecting it from chemical pollutants.

Gustavo Quijano

Cotance continues to represent the interests of the European tanneries by challenging all kind of tariffs on leather and leather products. He proposed action for a wide reaching sector agreement amongst all major leather producers and suggested in an opportune moment that Brazil should consider joining Cotance so as to strengthen the organization and fortify Brazil’s position in the world market at the same time.

Mr Quijano’s proposals covering a wide ranging agreement on leather market trade were as follows:

Contance proposals

His conclusions were also outlined in writing:

Contance Conclusions

As readers of this report can clearly see Cotance envisages much work ahead so as to secure a better deal for the leather industry and Mr. Quijano did not hesitate to point our the inherent flaws in the industry outlook. It remains to be seen if such proposals will be taken up by countries such as Brazil which are at the center of the world stage in the leather industry.

The final presenter with a focus of the situation in Asia was Michael Duck of the APLF group of major fairs. Rather than speaking about leather production, herd sizes and the environment Mr. Duck concentrated on key facts which make Asia the new motor of the world economy both in manufacturing and consumption.

He referred to the December 2004 tsunami and how resilient Thailand and other affected countries had been in rebuilding after the catastrophe. The comparison with the rebuilding of the world economy, especially in Asia, was extremely illustrative especially when he referred to the mass confidence required to reconstruct after a major destructive event.

Michael Duck

The wise use of funds invested by the Chinese government in their US$586 billion stimulus package were directed at infrastructure projects and led to a trickle down effect to indirectly and successfully stimulate consumer demand. This demand was clearly illustrated by auto sales in China which touched 13.6 million in 2009 according to the BBC, some 4 million units more than in the US. Likewise, India also sold more than 2 million automobiles for the first time. Mr. Duck called this a “paradigm shift”.

The aforementioned paradigm shift is defined by the fact that Asia has always been considered the “workshop of the world” but now had “shifted” to become a consumer oriented economy, especially in China. In this shift Mr. Duck also included Korea, Singapore and Indonesia and did emphasize that Japan was still in a recessionary trap as it had been since the 1990’s.

Instead of the BRIC countries Mr. Duck preferred to talk about the BICI countries – that is, Brazil, India, China and…….Indonesia. In terms of consumer demand he gave the example of the attitude towards car upholstery in China. Whereas in Europe a maximum of 25% or vehicles will be equipped with what is regarded as a luxury interior, in China a far higher percentage of vehicles have leather upholstery. In the case of the latest Volvo model, 100% of such models manufactured in China will have leather upholstery. And that amounts to a lot of hides from specialist tanneries. A good example of the “paradigm shift” is that just twenty years ago almost all Chinese who have own vehicles for the first time as new consumers, were probably still riding bicycles. This is the speed of development which has taken the whole world by surprise and the completion of this next “shift” from workshop to consumer society could be complete by 2020.

With its almost tax free and free trade status Hong Kong is still the business hub of Asia and retail there, despite the economic crisis, is still phenomenal. The Chinese need to buy brand names and it is agents and merchants in Hong Kong who specialize in fomenting trade between the mainland and the Hong Kong SAR.

With incomes rising in China as well as India – more than 200 million Indians now earn more than US$40,000 per year – Asia is the ideal market to sell both raw materials and position a company to sell consumer goods such as shoes, fashion and leather goods.

As host Mr. Goerlich thanked both the panel and the audience participants and agreed that many challenges face the leather industry for 2010. However, after 2009 the sector is now better prepared to face any future shocks than when the financial crisis hit the hide market in September 2008.

The Forum last just under three hours and it will be interesting to look back at the forecasts pronounced at the end of 2010 in the light of any further economic turmoil, or hopefully, tranquility.