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21/08/2009STRANGLING THE HANGEDThe Brazilian exportation of wet blue leather, the first stage of tanning, are rated in 9%. This tax had already gone, came back, had already lowered and rose. But what it really needs is finally disappear.
It is argued that this taxes benefit the national shoes, upholstered and artifacts industries because provision them the raw material at competitive prices. Furthermore, the taxes would stimulate the value aggregation inside the tannery, thus they would produce crust leather and finished leather.
Value aggregation, in theory, generates more employment and profit. But then we fall in the mistake of analyzing just one side of the question.
We need to think about it: is there a so huge lack in domestic market to be necessary making harder the exportation of wet blue? And more – are these supposed benefits, brought by the tax for one tip of the chain, most important than the negative impacts observed in the other? Would not be better to stimulate the value aggregation by tax benefits and special credit lines, instead taxing the output of a lower price product?
I will start backwards. It’s obvious that stimulate is better than taxing. But it is more difficult too, more laborious, and it requires a degree of mental abstraction that our public politics formulators, usually don’t have.
The tax on wet blue has caused huge damages. At last, there is a left of leather in the domestic market, despite the littler number of slaughters.
See on picture 1, the evolution of bovine leather production (hide or skin), in Brazil, through the last years. See that the Brazilian production jumped from 24.09 million of skins in 1994 to 42.46 million in 2008, an increase of 76%.
The interesting is that, according to the Agricultural, Livestock and Supply confederation (CNA), the national industry has capability to use only 15 million of skins to transform in final products. The left has to be exported.
Among these final products, there are shoes. Since years this segment is not more the major destination of leather, because the synthetic products took the place of the bovine skin. Then, leather started to go, mainly, to automotive and furniture industries. See the picture 2.
The case is, in a global overview, the growing rate of furniture and automobile industry production follows the USA, father of global crisis. These are the sectors that were more affected by the actual economic depression.
If we analyze the Brazilian bovine leather exportations destiny, we will see that around 50%, in volume, goes to China and Hong Kong, 30% to Italy, almost 3% to Vietnã and just 2% to the USA. Really, a good part of European and Asiatic buyers manufacture the Brazilian leather and sell it to North-American companies.
This mess pushes the tanneries, which push the slaughter houses. The result is the drop in prices of the skins.
Follow, in table 1, the comparative variation of price of steer, tallow, beef, meat and bone flour and skin between july-2007 and july-2009.
The intensity of leather drop is not kidding!
Scot Consultoria started to quote this market on April of 2001. At that time, we quoted just the low quality leather (from informal slaughter houses and little ones), which has a lower price. But what happened with it can be used as an example to the first line leather.
Veja a figura 3.
Between April of 2001 and July of 2007, the leather quotation dropped 91%, in nominal values. Any other bovine product had lost value due this period. In real values, which consider the inflation rate, the dropping of this raw is around 96%. Almost zero!
Look the result of this drop in the slaughterhouses’ profits (this analysis I´ve “stolen” from a CNA paper). Let’s consider that a 17 arrobas steer gives 40kg of skin. Follow, on picture 4, the evolution of slaughter house incoming with the sold skins, in relation with the prices paid by the steer.
This picture has made using the low quality skin, because our history prices to this product is longer. It shows that, in april-2001, the incoming due leather sales was about 12% of the steer value. Today, it represents less than 0,6% of the steer.
Let’s show it by other way. Look at table 2.
The “finest” relation of table 3 is with the tallow. With one kilogram of low quality skin we could have bought, in april-2001, almost 2.85kg of tallow. Today is one kilo of tallow that buys more than 6 kilos of leather.
This situation made us to write, on July 13th, the study “The problem of slaughter industry margin is not at the beef”. I´ll remember here some of the information from that analysis. See table 3.
The table brings us the prices lacks between the Physical and Scot Index and the steer. Lower they are, “less negative” the lacks, best for the slaughterers.
The Physical Index is the bovine carcass at wholesale market, that was about R$72.24/@ on July 28th. The Scot Index, at the same day, was R$74.24, show incoming with the sales of steer, leather and tallow. The steer was quoted at R$82.00/@.
See that the lack between Physical Index and steer, in 2009 average, has stood between values considered good (under 2003-2009 average). Today it is around 12%, it is true, but anyway it stills under the last years average.
The lack between Scot Index and steer has grown continuously since 2006. The 2009 average is over the normal rates, being practically double of the registered on the best years (2005 and 2006). Nowadays, it’s around almost 9.5%!
If the problem is no at the beef, it only can be at leather and/or tallow. The tallow has worked dropped during last weeks, but the leather has worked dropped since years ago.
Today, at least when we analyze the domestic market, we can say that a lot of fault by the “push over” on the slaughtershouses’ profits is caused by leather, not beef. Leather is over. Beef has, at least, followed the steer.
This uncomfortable situation, in margin terms, that makes the slaughterhouses resistant in rising steer prices. The result is a period between the harvests starting under the expectations, with market “walking to the side”.
For sure that is not the tax on wet blue the responsible by the dropping of skin prices. But it makes pressure on the margins of a chain that is, obviously, already working pressed.
Smalls and medium tanneries (which work mainly with wet blue), slaughter houses and breeders are losing a lot with this restrictive and antique politics.
This tax has passed from the time of falling down.
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