Hides and Skins
The Asian crisis has hit U.S. hide exporters hard with lower prices and reduced demand. However, other countries are taking advantage of these prices and buying more U.S. hides. Next year should be better for hide exporters since lower world slaughter and improved Asian demand should push up hide prices to more profitable levels.
Production of hides and skins among those countries tracked by the USDA declined for the second successive year in 1998. Production gains in the United States, Brazil and China were more than offset by lower production in the European Union, Argentina, Australia, and Russia. Production is forecast still lower in 1999 as cattle slaughter is expected down 2 percent, most significantly in North America and the European Union.
Trade in bovine hides and skins is expected to decrease slightly in 1998 as Asia's financial crisis has caused a significant drop in imports by Korea, the single largest market for imported hides, and in Japan. Asia is expected to import even fewer hides in 1999 as the region's economic problems stymie leather manufacturing.
U.S. production of bovine hides in 1998 is forecast at 984,000 tons, up slightly from 1997. Although hide production in pieces declined approximately 3 percent in 1998, production by weight remained unchanged due to the 2.2 percent increase in the average slaughter weight for U.S. cattle to 545 kg/head. For 1999, the combined effect of reduced slaughter and lower slaughter weights is projected to result in a 7.5 percent fall in production to 910,000 tons, the lowest U.S. production since 1993.
The price of U.S. hides has been on a roller coaster ride throughout 1998. The Asian financial crisis that began in the summer of 1997 and spread to Korea by the end of 1997, slashed demand for U.S. hides as Korean processors and importers could not access credit. As the largest U.S. customer for hides, Korea's sudden departure from the market caused U.S. hide prices to tumble. Prices dropped from $81/cwt in early December 1997, to below $52/cwt in mid-January 1998. Prices rebounded to approximately $71/cwt in March, but resumed their downward trend to about $55 by October. The outlook for prices is more bullish in 1999 given the expected drop in U.S. hide production next year.
Every Cloud Has a Silver Lining
Lower U.S. hide prices are also reflected in the lower unit value for U.S. hide exports thus far in 1998. Based on trade data through August, U.S. whole hides are fetching about $48/piece, compared to $58/piece last year. U.S. hide exporters have capitalized on low U.S. prices by expanding sales to markets outside of Korea, Japan, and other Asian economies facing economic difficulties. Sales to Mexico, China, Italy and Spain, in particular have benefitted from the competitive price of U.S. hides in 1998. Through August, U.S. hide exports to Asia, excluding China, were off by almost 30 percent by volume compared with last year. Exports to the aforementioned countries, on the other hand, increased almost 50 percent. New opportunities have also opened up in Latin America where U.S. hides are appreciated for their quality and reliability.
The United States continues to dominate the world hide market, exporting almost 50 percent of its production-mostly in the form of whole cattle hides. According to the U.S. Bureau of the Census, exports during 1997 totaled 19 million whole cattle hides. Although this reflected a drop of over 6 percent from 1996, the value of exports increased by almost one percent to approximately $1,134 million as hide prices were relatively high most of the year. With hide prices down in 1998, the value of exports were about 24 percent lower through August at $611 million compared to $807 million during the same period last year.
A major reordering of U.S. hide markets is expected by the end of 1998. While Korea is likely to remain the number one U.S. market for hides, Japan, the number two market for U.S. hides until 1996, is likely to become the sixth most important market, behind China and Canada. Mexico is on pace to displace Taiwan as the number two market for U.S. hides this year.
Exports of split and unsplit wet blue hides increased 6 percent in value during January-August 1998, compared to the same time last year, to over $130 million. Unlike the price of whole hides, the unit cost of wet blues increased about 7 percent in January-August of this year compared to last year. Demand for U.S. wet blues has remained strong because of their suitability for better quality shoes and bags and the advantages for the importer of fewer pollutants to dispose of from the tanning process.
Major Markets for U.S. Hides:
Korea remains the single largest market for U.S. hides. Through August 1998, U.S. whole hide exports to Korea were down 33 percent by volume from 1997 levels. Korean hide imports for the year are forecast to decline 23 percent in 1998 and another 8 percent in 1999 to 252,000 tons. Korea's financial problems have made it difficult for many banks to open letters of credit to import U.S. hides. Thus, to alleviate this problem the USDA provided Korea with $100 million in credit guarantees for hides under its GSM-102 for fiscal year 1998. The credit line was quickly subscribed, and additional credit guarantees may be made available in fiscal 1999.
U.S. hide exports to Mexico increased over 27 percent during January-August of this year. For 1998, hide consumption in Mexico is expected to grow 10 percent. With Mexican hide production stable or declining, imported hides account for a growing share of total utilization, particularly within the footwear and automotive industries. Mexico's gradually improving economy has enabled many medium and small sized tanneries to operate at full capacity. Larger operations, such as the automobile upholstery industry are also reported to be experiencing a renewed boost due to improved domestic consumer purchasing power.
Imports are projected to increase over 4 percent in 1999 to about 125,000 tons, almost exclusively from the United States. Wet blue exports are also expected to continue to do well based on the Mexican government's recent legislation of strict environmental laws governing the treatment of all residual waters. U.S. exports of wet blues to Mexico increased from about $300,000 during January-August of 1997, to almost $2 million for the same period this year.
Exports to Taiwan have fared comparatively better during the recent Asian economic downturn, off 9 percent by volume and 30 percent in value terms. Exports of wet blues increased a hefty 180 percent valued at over $20 million. Taiwan's hide imports are expected to increase slightly to about 145,000 tons in 1998, and remain at that level for 1999. U.S. hide exporters are expected to regain their previous market share of over 70 percent given their current price advantage.
China's imports of U.S. whole hides have continued to rise in 1998, increasing over 34 percent to almost 2 million pieces valued at over $100 million during the January-August period. Exports of U.S. unsplit wet blues rose an impressive 760 percent to almost $13 million. The United States supplies about half of China's total hide and wet blues imports. According to Chinese import data, in 1997, China imported almost 200,000 tons of raw hides-almost 80 from the United States-and about 300,000 wet blues-about 150,000 tons from the United States. In addition to direct U.S. exports to China, the re-export of hides from Hong Kong to China amounted to an estimated $160 million in 1997. China has long benefitted from the relocation of tanning capacity from elsewhere in Asia. The recent economic turmoil in Korea could in fact expedite the process.
Japanese imports of U.S. hides continues to slide as its economy, and that of its major leather importing countries, continue in recession. Total hide imports are expected to drop over 30 percent in 1998 to about 85,000 tons and remain flat into 1999. On the upside, U.S. hides have gained market share from Australia and New Zealand thus far in 1998, according to Japanese import data.
The EU has increased its imports of U.S. hides almost 150 percent during January-August, 1998 to well over 1 million pieces of whole hides, and 400 pieces of wet blues. Lower EU production, favorable U.S. prices, and a drop in Russian hide supplies have opened new opportunities, especially in Italy. Total EU hide production is estimated to drop 3 percent in 1998 to 720,000 tons and continue this trend in 1999 to 700,000 tons. Russia traditionally is the largest non-EU supplier of hides to Italy. However, this year, Russian exports to Italy are down approximately12 percent, prompting Italy to look for other sources.
U.S. hide exports to Italy this year reached almost 1 million pieces as of August 1998, up 150 percent. Calf and kip skins were up 2 percent over the same period. The average unit value of U.S. hide exports to Italy is down 17 percent in 1998 at $44.90/piece compared to $53.90/piece last year. U.S. hide exports to Spain have made similar in-roads, increasing over 200 percent in the first eight months of the year. Spanish production of footwear expanded in 1997 due to an improved domestic economy and increased exports of footwear, apparel, and automobile leather.
Although U.S. hide exports to South America do not compare with those to Asia or Europe, the region's leather industries offer an alternative to the depressed Asian markets. From January to August, exports to Brazil and Argentina increased from 6,000 pieces to 138,000 pieces. Already the value of U.S. exports to these two countries is more than double exports for all of 1997. Strong domestic demand for leather goods and better export prospects are stimulating the Brazilian leather tanning industry, while declining slaughter in Argentina requires more imported hides to sustain current tanning capacity. Argentine leather exports in 1997 were valued at $800 million, mostly to the United States, Asia, and the EU. While Argentina's slaughter industry is lobbying for the elimination of the current export tax on hides, local tanners support retaining the tax.
While the United States exports close to 500,000 tons annually, only Brazil and Russia export 200,000 or more tons of hides a year, with Russia projected to drop below this level in 1999.
Brazil's hide production is projected to increase slightly in 1998 due to a marginal increase in slaughter. Production is expected to remain flat in 1999. Brazilian hide exports are forecast to increase in 1998 and 1999 due to the government's recent decision to rescind restrictions on the export of wet blues, lower domestic demand from the footwear industry, and enhanced market development efforts by Brazilian exporters. The industry's goal is to export $1 billion by the year 2000-mostly to Italy, Portugal, Spain, Hong Kong, and the United States.
Russian production of hides continues to decline. At 500,000 tons in 1990 and 1991, production is now estimated at 235,000 tons in 1998, and projected to fall to 215,000 tons in 1999. The Russian cattle herd has declined 35 percent since 1994. Hide exports have held up relatively better, down 6 percent since 1994, and down a modest 4 percent in 1998 to 202,000 tons. Unfortunately, Russia's current financial difficulties are expected to worsen the plight of its cattle and tanning industries.
For more information, contact Jose Rivera, (202) 720-1349.