The “Rendezvous”, in the tenth COUROBUSINESS’ anniversary, is a gift to readers. It brings a consistent market analysis prepared by one of the greatest experts in leather in Brazil. We are talking about Wolfgang Goerlich, current Vice President of Marketing and Trade Promotion of the CICB – Center of Tannery Industries. For 20 years he was director of the Curtume Carioca (Tannery from Rio de Janeiro). He was also chairman of the CICB, when he organized the first and so far the only Congress of the International Council of Tanners (ITC) in South America. He founded in Brazil the company Kaufmann Goerlich & Co. Ltd. which has become one of the greatest agents of export and import of hides and has continued this work with the W. Goerlich & Co. Ltd.
Goerlich speaks as a complete expert of the leather market. We made him a number of questions of general interest. The answer, for better use of its content, as a historical edition, is shown in a chain, departing from a short retrospect until the central information that all want to know, that is, what can be expected in leather exports in the end of 2008.
THE COMPETITIVENESS OF BRAZILIAN TANNERY INDUSTRY
EXPORTS FORECAST IN 2008
Wolfgang Goerlich
A brief retrospect of the development of tannery industry in Brazil
In the 60’s, the slaughter of bovines ranged around 10 million per year and the country had about 600 tanneries distributed from north to south. Only about 60 tanneries were considered industrial companies and the other ones were smaller establishments and the greater number had quite precarious facilities.
The state of Rio Grande do Sul, with its European herd of cattle, was the most traditional and important tannery pole, but also in Sao Paulo, in the region of Campinas, in Minas Gerais, in the Northeast - particularly in Pernambuco, Bahia, Paraiba, Rio Grande do Norte and Ceara - and in the north region, in Belem and Manaus, there were important tanneries. In Rio de Janeiro there was the Curtume Carioca, the biggest and most diversified of all, with a participation in bovine hides of around 10% of the national production.
Save the tanning that used to have exclusively vegetable tannins producing soles, straps and sealing articles, the other ones, tanning based on chrome, were poorly skilled and used to produce primarily for the footwear industry.
In the 70’s and 80’s there was a considerable evolution in livestock, the cattle and slaughters grown extraordinarily, the butcheries moved to nearby cattle and many tanneries followed this trend. With a higher availability of hides, allowing exports in large scale, the tannery industry has been modernized, new companies emerged and many of the older establishments that were unable to follow the progress closed their doors.
At the same period, export of footwear began, and, however, Brazilian tannery didn’t take much benefit of it, since the great majority of footwear stores undoubtedly preferred the Argentine leather which was imported into Crust (Semi-trimmed). In the footwear export poles - Novo Hamburgo and Franca - great trimming companies begun to emerge, partly directly linked to footwear stores. Tanneries that were unable to modernize and to adapt to the new reality closed their doors. In the early 90’s many of the traditional names had gone off the map. That was not because production capacity had diminished. Rather, new companies emerged and the tanning had capacity to absorb and benefit all the raw material provided by the slaughter that since the 60’s had tripled to 30 million, though a part of it only in Wet Blue.
Until then the Brazilian raw hide deriving from animals of extensive breeding, with many defects and on its condition of being 80% zebu, therefore with termite, was considered inappropriate for the production of leather for furniture. In the decade of 90 it has begun the great revolution with technological advances: processes were developed in Italy to use Brazilian leather with advantage, for upholstered industry. As the Brazilian leather at that period was cheaper that the ones traditionally used for such purposes, Italy, largest producer of leather for furniture, began to import massively Wet Blue leather from Brazil. Between the years 1988 and 2006, the slaughter grew from 35 to 47 million promoting this development.
The current Brazilian tannery industry
A new age has begun for Brazilian tannery industry. New factories, in part with foreign capital, were built in order to produce in large scale with the most advanced technologies, particularly leather for upholstered and automotive leather, and it is currently estimated that between Wet Blue, Crust and Trimmed, two thirds of the hides exported from Brazil are intended for such purposes.
Alongside there was a huge concentration of production and today it is estimated that 80% of the country’s productive capacity is concentrated in the hands of only 10 companies, and the largest company, alone, is responsible for more than 20%.
An even greater concentration happened in the butchery industry, in which only three groups currently dominate the market of meat and also of raw hide, expanding its activities increasingly on the field of tanning, apart from investing heavily abroad, and a particular group has already become a world leader in the market for beef.
A high capacity of production is considered one of the prerogatives of the globalized market; therefore, we must consider the merger that has occurred in Brazilian tannery segment, in the last few years, as a positive factor.
The volume business prosecute more and more between companies with high potential. The main articles for furniture, as well as for cars, footwear or clothing have become commodities at highly competitive prices and they were viable only with a production on a large scale. Besides, regarding to consumers, there was a concentration observed in all countries and concerning all types of material. In fact, currently two thirds of the exported hides are destined to furniture and cars segments. About 80% of exports are made by 15 companies only and 73% of exports are destined to four countries only, China with Hong Kong, Italy, the United States and Vietnam.
For medium and small tanneries, currently, the alternative to survive in the domestic market as well as in export, is the production of special items and products of fashion divided into smaller lots, but generally better paid.
Regarding to small tanneries, there is no reliable data on the current amount and their respective production capacity. In any case, the number is expected to decrease more and more and today it should be below the 800 eventually mentioned in the media.
In short, we can say that the Brazilian tannery industry is well prepared to meet the challenges of globalized markets; it has raw material, it has modern plants with advanced technology, ability to produce in volume, technical and trained labor and, last but not least, very modern management. The industry is ready, but the overvalued Brazilian Real is the main factor of the current lack of competitiveness of Brazilian leathers. The main reason for the current crisis, undoubtedly, is the high cost of production estimated in US$ due to the excessive valorization of Brazilian Real.
The other reasons such as high interest, exaggerated taxes, delay or failure in the return of tax credits and all the rest called “Brazil cost”, undoubtedly are also important items to be corrected, but they can not be considered directly responsible for the current crisis, since they were already there before. Also, the increases in chemicals products and other inputs linked to the explosion of oil prices on the world market are not responsible for the current lack of competitiveness of our industry, because these factors also affect our competitors abroad.
The reasons for the significant reduction in exports in the first half of 2008
Before examining the specific reasons for the reduction of exports in the first half of 2008 against the same period of 2007, we must emphasize that the number of exported hides in the first half of 2007 with 17,781,677 hides was absolute record, because it had exceeded in 758,084 hides the previous record established in the first six months of 2006.
Second, the reduction refers basically to hides in state Wet Blue that fell from 8,929,952 in 2007 to only 4,742,422 in 2008. So we have to Wet Blue hides a reduction of 46.9% compared to 2007. This significant reduction in Wet Blue hide decreased the total volume including all types of bovine hide in 23.4%, since the Crust hides increased only 8.3% and the Trimmed decreased 2.8%.
In US$ the fall in exports was only 4.1%. As the costs of tanning are in R$, it is necessary to convert the export revenue in R$. Based on an exchange rate of R$ 2.10 for the first half of 2007 and R$ 1.67 for the first half of 2008, we found that the fall in the value of exports in reality was much higher: 23.8% because the revenue fell from R$ 2,327,749,435 to R$ 1,774,600,758, that is, 23.8%! it is practically proportional to the fall of the volume.
When you search for the reasons for the dramatic fall in exports of Wet Blue, we find the following conclusion: as a result of the lack of profitability in livestock, there was a greater slaughter of matrices and from 2007 the Brazilian cattle shrunk, the slaughter fell, as well as the offer of raw materials. Due to the demand, the price of raw hide in Brazil has not followed the fall in the U.S. market in late 2007 and early 2008 and for a long period is maintained at a level incompatible with the global market. The Brazilian leather, particularly the Wet Blue, was too expensive and trimmers of hides for furniture, reached by the building crisis in the United States, have drastically cut their purchases in Brazil.
The quantity of Trimmed hides exported since 2006 has been stabilized around one million of hides per month and the value in US$ in 2008 is already 60% of the export revenue of bovine hides. Along with the “Crust” (semi-trimmed) the participation in the export revenue rises to 80%.
The trend is to export more and more Trimmed and Crust hides, therefore, the articles with greater added value, should continue in the medium and long term.
As in the contracts in Crust and Trimmed the interdependence between the producer and the customer is bigger, the business with these types suffered less. Besides, the programs for these two types of leather are generally more elongated and in the most difficult phase, many exporters, looking for keep customers and insurance markets, have continued at least part of their business, even if the results of their companies were seriously compromised.
The prospects of exports for the second half of 2008
To make a projection of the development of exports in the second half of this year we must take into consideration the following factors:
As a result of the current world crisis, neither the leather demand, nor the slaughter must increase in the second half.
The international market for leather at the beginning of the semester presents already a loss trend.
At the beginning of the second half, even if slaughters continued lesser than those of past years, the prices of raw materials finally began to dramatically fall. The domestic market had been completely saturated and foreign buyers from have shown no willingness to renew or make new business without a significant reduction in prices. As the production costs remained extremely high, the only way was the reduction of prices of raw hide.
Taking into account the facts above, we can make the following forecasts for exports in the second semester:
Exports in quantity of hides:
First half 2007: 35,345 hides. First half 2008: 28,646 hides.
During the second half of 2008 the quantity exported should increase since prices will be more attractive to buyers. The price reached in June, US$ 39.48 per hide, must fall about 10% to a basis of US$ 35.00 and the volume should increase to 60/80,000, meaning the basis of 70,000 hides for US$ 35.00, an export revenue of US$ 2,450,000 against US$ 856,132 in the first half.
Even with a semester revenue almost tripled, the export of salted hides may continue insignificant, reaching only 0.12% of total value of the exports of bovine hide.
Exports in quantity of hides:
First half 2007: 8,929,952 hides. First half 2008: 4,742,422 hides.
In a short term there is the possibility of a reaction in exports of Wet Blue, if the price of national raw material falls and stays once more attractive in the international market. In this case, the high costs of processing in Brazil and the largest rotation in the Wet Blue, may encourage the export of wet blue again.
Taking into account that these facts will take effect probably from October, we can estimate that the total to be exported in the second half reaches 4,800,000 hides, quantity almost identical to the first half. The price might fall from US$ 51.08 recorded in June to an average of US$ 46.00, providing a semester revenue of US$ 220,800,000 against 243,906,976 established in the first half.
Exports in quantity of hides:
First half of 2007: 2,474,567 hides. First half of 2008: 2,679,363 hides.
Exports of leather in Crust should continue on the basis of 450,000 per month, reaching a total of 2,700,000 and the price should be in a level of US$ 72.00, giving a semester revenue of US$ 194,400,000 against US$ 211,141 .570 of the first half.
Exports in quantity of hides:
First half of 2007: 6,341,913 hides. First half of 2008: 6,162,708 hides.
The average price of leather for US$ 99.12, reached in June, must fall in the second half for an average basis of US$ 90.00, and the quantity exported should be in a monthly average of one million, that is, 6,000,000 for the half giving a revenue forecast of US$ 540,000,000.
It must be understood that all estimations at this stage of total instability of the global economy and of the markets contain a risk above normal and should be interpreted based on the available evidences at this time. The quantity of hides to be exported in the second semester is the result of a dose of optimism and if the world crisis will get worse, it may be far lower.
Following the presented projections, it will be exported in 2008 about 27.2 million bovine hides against 32.9 million exported in 2007, meaning a fall of 5.7 million, that is, 17.3% lower. The value of exports would fall to US$ 2 billion against US$ 2.17 billion exported in 2007.
Revista Courobusiness, Edição 59 Jul/Ago 2008.
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