Market bad practice – trade that stinks

The Sauer Blog
Published:  05 June, 2015
Ron Sauer

Sounds tough. And tough it is. But before starting to write about this regretful part of our trade I must explicitly state that it does not relate to all of the trade, just a small part of it. The majority of the industry is ethical and admirable. I’m not referring to that.

It is the bad part that needs attention. It is frightening that these days to hear regularly from our Sauer Report correspondents worldwide the same news: sellers (raw materials) are not busy selling; they are busy trying to save their outstanding contracts.

The market and the lower prices in many (not all) origins have created a great number of contracts shipped or to be shipped, which remain unpaid simply because they are expensive in today’s market. Markets go up and down and therefore contracts exist and should be respected by both sellers and buyers no matter how the market moves. At least that is how it should be and that is why the ICT and ICHSLTA created the international contracts many years ago. A marvellous achievement at the time but widely ignored and disregarded today.

Bad habits return

A growing number of buyers in a number of countries refuse to open LCs (letters of credit), transfer agreed pre-payments, refuse to take up documents in the bank, invent market claims, etc with one purpose only: to cancel or renegotiate a contract. They are dishonouring the contracts they signed. It has been said and written before that contracts are no longer worth the paper they are written on. In many cases this is true and we know of people in the leather industry who indeed do not even bother to produce a real contract. They remain with an email confirmation of a deal and later “we shall see what we do”, is their position.

Industry traders and tanners associations have been trying to change this but in vain. Recently reinvigorated trade associations have been trying to improve business ethics, but it seems it’s in vain. We have got nowhere. It still happens and is happening more and more in my opinion. Not a development this industry can be proud off.

As seen before in similar situations, there are sellers who now feel entitled to do the same. They accept whatever order they can get and see what they will do about it later when the moment of truth arrives. One correctly said that the name contract should be changed into ‘option’. You kick me so I kick you.

This is understandable but it does not help the international trade become more professional. It brings us back to practices of the Wild West.

History repeated

When this phenomenon last came to surface after the 2008 crisis, the Sauer Report said that sellers (hide/skin traders and packers) should agree among themselves not to accept any blackmail from the buyers and accept a common policy in coordination with their national or global association (ICHSLTA). As its been proven its very difficult and as it showed it never worked out. For such problems the associations proved to be powerless. 

My argument at the time was that if sellers let the bad guys get away with it, and they did, they would be given carte blanche to do it again whenever it suited them. And they do, as many hide and skin sellers have to admit today. It worked then, so it will work now is the prevailing attitude.

Stopping the rot

How can we stop these unhealthy developments? We must first of all realise and admit that if other industries can manage to continue and respect contracts between themselves, then the leather trade should be big enough to do the same. Recently, we have seen requests from the North American (USHSLA) and the Chinese (CLIA) associations in open letters to their members (reproduced in The Sauer Report). It is a confirmation that things have to change but not enough to actually to make it actually happen I fear.

I would be happy to hear how the industry would tackle this persistent problem? Below is a suggestion. 

There are existing good examples in the tanning industry. I am talking about the certifications they have developed concerning clean tanning, not using certain chemicals, other environmental concerns, labour conditions, gold and silver awards etc. The actions taken by the Leather Working Group and others are admirable and seem to work and demand respect.

I wonder if something similar could not be developed for traders and tanners in the raw materials trade also. A certificate, which gives the promise that the company carrying the certificate, will respect the contract they sign under all market circumstances. To get the certificate one would have to prove a good history. There must be conditions. 

To get a buyer and a seller with such certificate together would mean good news. It could have interesting price consequences as well. Reduced risk could mean better margins, more security and lower prices. At the same time one could say that those who do not want the certificate already seem to have bad intentions before even starting. 

Such rules are useless if there is no punishment for those who break them. They would automatically lose their certificate and it would be made public. Some organisation would have to manage the operation such as the Leather Working Group maybe or another existing or new association.    

Something must be done if we do not want this trade to sink further into the abyss every time the market moves up or down, which it will. 

Ron Sauer

RonSauer@theSauerReport.com

www.theSauerReport.com

To subscribe to TheSauerReport.com or for more information please contact: maria@internationalleathermaker.com or telephone +44 (0)203 735 6538. 

comments powered by Disqus