Less demand from China brings down hide prices

[Neo]

Hide values continued to rise throughout 2006 and, by December, all
steer hide selections were commanding prices well over $70 per piece
on an FOB basis. In the latter half of 2006, steer hide prices rose
around 20% while cow hide prices went up by about 22% for the year.

It was not possible to predict the extent of the demand for US hides
during the past year. According to the US Hide, Skin and Leather
Association, China was the biggest enigma for the hide industry. 'In
the past five years, China has expanded their tanning industry so
rapidly that today we are at a point where China consumes well over
50% of the hides produced here in the United States.

'It is easy to see how China has dominated the market over the last
several years! With established tanneries in Korea, Thailand, and
Indonesia still running and needing hides, these tanning areas are in
a constant battle to get enough hides to tan. Between the Chinese and
the other Asian tanners, there simply have not been enough hides to go
around, thereby causing hide prices to increase.

'In 2006, the constant rise in hide prices made profit margins
impossible to maintain without substantial increases in leather
prices. In many cases, these necessary price increases were not
forthcoming, with leather prices actually forced lower. The tanning
industry at the end of 2006 is probably in the toughest financial bind
we have seen in years. As a result, we are likely to see an increase
in tanner bankruptcies and closings in the months to come.

'Despite these financial difficulties, there are simply too many
tanneries making too much leather and needing too many hides. As a
result, we have seen the demand for hides outstrip the available
supply, so hide prices continue to climb.'

Speaking at the meeting of the International Council of Hides, Skins
and Leather Traders Associations in Hong Kong earlier this year, Mike
Reddington spoke of his association's expectations for 2007, in
particular with regard to China.

'Today, the winds of change are now spreading through China because
pressure is being brought to bear on the Chinese government by
environmentalists and foreign governmental financial groups.

'There has been a large growth in the middle class, as managers are
needed to oversee the production lines and sell the products. These
middle class managers command higher incomes and this is creating a
much larger domestic consumer base than expected. Consumer demand is
skyrocketing in China.

'Environmental concerns are suddenly in vogue. The upcoming Olympics
in China have prompted the Chinese government to make drastic changes
in effluent treatment rules. Evidently, four of the five rivers that
run through or around Beijing are so polluted that they cannot even be
treated to produce drinking water. The government is now cracking down
on any polluting industry and that includes the tanning industry. This
is all to show the world a good face during the upcoming Olympics in
2008 and to appease both domestic and international environmentalists.

'Many tanners and shoe manufacturers are looking at other Asian
countries to make leather and shoes. Vietnam, Indonesia and Thailand
are all under pressure to increase production. However, their
governments have seen what has happened in China and are now resisting
any urge to expand polluting industries. Another problem with moving
the hide and leather industries is that moving the tanning production
to other countries is not that easy.

'Building a tannery takes years, including the necessary water
treatment facilities. Therefore, since tanners have made the
investments and built the plants in China, we believe that it would be
difficult to find anywhere to go in Asia other than to poor third-
world countries, such as India or Bangladesh. As a result, tanners in
Korea and Taiwan will once again regain some of the business they lost
to China. Tanneries that were not closed in those countries when
production moved to China should reap increased leather orders in
2007. We expect to see more American hides exported to Korea and
Taiwan next year.'

In 2006, 86% of all hides and skins were sold to East Asia (mostly
China). Overall there was an increase in the East Asia region
generally, along with Oceania. This could offer potential markets for
the leather industry that may move out of China due to the difficult
margins.

There is no doubt that when it comes to market share, China is well to
the fore and changes that are occurring in China need careful
observation. However, it is likely that China will continue to require
the most hides in order to sustain their large tanning and leather
industry.

China bought ten million cattle hides in 2006 compared with eight
million the year before and just under five and a half in 2002 and
2003. Hong Kong took a further 1.35 million, down from a peak of 2.5
million in 2003. Korea takes second place with 3.5 million which is
actually down from 4 million in previous years and a 5.8 million
requirement in 2002.

Taiwan and Mexico are the next two most important customers with
Taiwan nearing the two million mark and Mexico with just over 1.2
million. Italy, followed by Thailand hover just under the half
million.

Footwear imports

By 2004, footwear exports from China had increased by more than 17% to
5,885 million pairs and the US was the main destination with 1,742
million pairs. In total, the Asian region increased production by 3.5%
and consumption by 0.5%. In North and Central America, footwear
production decreased by 8% and imports increased by 6.4%.

The US topped the table of leading importers and was second in the
table of leading consumers. Footwear consumption in the US was up to
7.3 pairs per capita per year. In South America, Brazil was the only
country in the area that increased footwear production. Overall
production increased by 89 million pairs. Brazil exported 189 million
pairs to 212 countries worldwide worth US$1,414 billion (9% less than
in 2005) and produced 755,000 pairs. The domestic market consumed 540
million pairs.

By 2006, footwear imported from China (excluding rubber and
disposables) had risen to 1.771 billion pairs. More recent statistics
showed that US footwear imports from China had increased 8.7% to 201.7
million pairs worth $1.2 billion in January 2007. China is by far the
largest footwear supplier to the US, with an 87.2% of total US
footwear imports in January 2007, up from an 85.7% share in January
2006.

US footwear imports from a number of countries showed substantial
growth in January 2007, including Vietnam (9.7%), Taiwan (109.3%),
Canada (25.3%), Poland (22.3%) and Slovakia (120.5%). Vietnam is
expected to consolidate its position as the second largest US footwear
supplier to shift their focus away from the European market.

On the other hand, a number of countries experienced a drop with
imports from Brazil declining (-21.2%), Indonesia (-9.7%), Italy
(-7.6%), Thailand (-9.4%), India (-17.6%), Spain (-13.7), Dominican
Republic (-33.5%), Germany (-51.6%), Romania (-54.5%), South Korea
(-41.7%), Philippines (-28.3%) and Portugal (-33.2%).

US demand for Western European and Brazilian shoes has been hurt by
the rising values of the euro and the Brazilian real.