Macroeconomics

Slowly political decisions and situations are beginning to take over the headlines and are creating most of the influence on the financial markets.

We have the presidential elections in the United States, the referendum decision in the UK, the security situation around the European football championships in France, the general tensions in Asia between North Korea, Japan, the US and China, the doping scandal in Russia and the rising tensions between Turkey and the EU, which could have an influence on the refugee deal agreed some time ago. One does not even need to mention the war against IS and in Syria. Digging a bit deeper one could even find a lot more and this is why we have to consider that stability around the globe is becoming more and more fragile these days.

As a consequence many investors are taking shelter and are trying not to position themselves on the markets. Gold and gold mines and other security investments are becoming more and more attractive. Oil prices continue to rise and have passed the level of $50 per barrel. Nothing has changed in terms of the balance between supply and demand so the oil price too can be considered to be politically driven these days. Experts are beginning to discuss which way oil is going to go and whether this is just an interim rebound driven by speculation or if it is going to be a return to the price levels many politicians want. Higher oil prices would increase inflation and would reduce the massive pressure on the budgets of many countries dependent on oil export revenues.

Looking at the commodity price indexes in 2016 it is obvious that most commodities have seen a pretty decent rebound, with rises of between 15% and 30% in 2016 so far. This does not apply across the board but this is what an index does; it balances all the products in the basket.

Stock markets have entered a stalemate although one has to say that the old saying of ‘sell in May and go away’ would not have been an appropriate decision this year. Stock market investors are sitting tight and watching what is going to happen over the next month or so before they reposition themselves in the stock market again.

On the currency markets we see a number of moves. Sterling remains under pressure and has lost quite a bit of its value owing to the unclear situation regarding the UK’s membership of the European Union. Some other currencies, in particular of raw material exporting countries such as New Zealand, have gained by up to 5% in the past two weeks against the US dollar.

The euro is still stuck in the very narrow trading range we have seen for some time. Everybody is watching the interest policy of the Federal Reserve and if there is a sign that interest rates will not be raised soon, the dollar falls by 2%. If there are indications that interest rates could be raised  sooner rather than later, the dollar gains again. However, no matter what, it is still stuck within the narrow ranges between $1.10 and $1.15 versus the euro.


Market Intelligence

We are now beginning to enter a very interesting time in the leather pipeline. Most of the world is preparing for the holiday period and this basically means productions are slowing down and decisions are being taken for the rest of the year, beginning in mid-September. Depending on where you are located, some have to take earlier decisions and others can leave it later. Fundamentally European tanners run on a four-to-six week period for raw material management and the tanners in Asia have to consider three to four months at the moment. The rising problem is the general decline in global shipping: slow-steaming is becoming more and more standard, bigger ships are travelling from shipping hub to shipping hub, followed by feeder vessels. This is extending the time of the voyage, inbound as well outbound. In total this means roundtrips to and from Asia are today about 14 to 21 days longer than they used to be. Consequently, plans have to be adjusted and it might be time to take a different view of the leather pipeline in general.

We try to cover most leather markets and most production and we realise frequently when we speak to raw material people, tanners, manufacturers and retailers how little they sometimes know and understand about the leather pipeline outside their own world. Things are more connected than people sometimes think. We may just mention that there is a stiff resistance in some parts of society against beef and related products (including leather). So far this has left for example the automotive industry totally unmoved and leather is still successfully promoted there, but this could change.

We are not too far away from self-driving vehicles. When they begin to penetrate society and become common on the roads, the interior of the cars will change too. Will cars remain private and an individual product with more focus on individual taste or will they become more public and used by many? This could mean a lot for the interior and could boost leather or destroy leather depending on the perspective of owners and of the car industry.

We sometimes just collect a number of topics which have been catching our eye in recent months and we just throw them into the ring for discussion. The analysis of the business is really not easy, and we have a large number of conflicting pieces of information.

Questions:

The above is neither a complete list, nor are the items listed in terms of priority. It is just a collection of facts, ideas  and questions, which may sound reasonably silly to some, but they are points that are already coming under intense discussion, at least outside the leather pipeline.

Activity in the leather pipeline itself has been something of a mixed bag these last weeks. The industrial supply chains have continued to be busy and with their focus on standard, uniform raw material types there is steady and sufficient demand here. The price spread between these hides and the more fragmented, more complicated, lower-quality, lower-weight and less available hides has further increased and this has now begun to attract buyers to the cheaper alternatives. We hear of numerous test-runs from tanneries that have raised the appetite to check to see if the use of certain cheap alternatives might be able to generate more margin.

Chinese buyers in the north have slowly begun to return to the market after they had realised that suppliers were simply no longer willing to let prices decline despite the significant stocks that have built up and the pressure to sell. With the attitudes the big players took when prices declined, many suppliers decided that lower prices would not stimulate demand, but just boost the number of contracts that would not be fulfilled as agreed. So, better to keep the hides and wait for a recovery rather than sell them but never receive the expected and calculated revenue for them.

The split market is still a bit mysterious. While also here some niches can be found where business is reasonable, we have still to deal with a lot of negative sentiment and rumours as well as confirmation about large stocks still sitting in many places around the tanning industry. For many tanners it still remains a big problem that they don’t know how to value their splits and if these can be turned into cash to finance new raw material purchases.

The skins market remains depressed. More and more skins around the globe are being destroyed instead of used as a raw material for nice, fashionable and sustainable products. We don’t need to repeat that there are niches of success for skins too, but when big volumes of skins can be bought all over the world from $0 to $2 per skin, one has to understand and accept that this is not even covering the processing and logistics cost. There will never be a second deal at these levels. You may empty your stock at these prices, but you will not process any further skins if there is no sign of any profit ahead. So, without a substantial improvement in demand and prices, the supply of this raw material will continue to dry up.

It seems that we are at a very important junction. The Asian are now in the period in which they have to replenish their inventory if they want to continue to produce leather in the autumn. The existing stocks will be used up shortly and if they are not replenished and the new material shipped in the coming four weeks it could lead to supply interruptions. Suppliers have made it clear that after the drop in price for many items in the second quarter, they are not willing to make further price concessions. Leather demand is the issue at the moment and lower prices will not lead to a stimulation.

So, anyone who has buyers for their leather can pay the present price levels.

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