The Leather Pipeline - 12.07.16
12/07/2016
Slowly the first consequences of Brexit (if the UK is really going to leave the European Union) are beginning to develop.
Politicians who promoted Brexit have resigned and, behind the curtains, people are checking to see how much the referendum on June 23 is really binding. Referendums in general are questioned and leading EU politicians are still reacting like little children who are not getting their promised ice-cream. It is all pretty emotional and in some cases even being taken personally.
Enterprises and the markets are also starting to deal with the consequences of Brexit. Some companies have announced that they are going to leave the UK. Sterling is losing value and the discussion has begun over which city is going to become the next banking centre for the European Union: Paris, Frankfurt and Dublin are beginning to prepare. To keep corporations in the UK even tax reductions are emerging as a possibility, which is not at all pleasing to the rest of the EU at the moment.
Day by day more people are realising how far the consequences are going to go. Already the decline of the value of sterling is beginning to have its effect. Exporters to the UK face difficulties in pricing and imports from the UK are far more attractive than before.
After the recovery that followed the immediate reaction, stock markets began to decline again. The property investment market in the UK is also beginning to show the first cracks.
All the above is adding to the general concern that the global economy might be more vulnerable than many people would like to see it. Another example might be the situation in Brazil, where the economic crisis prior to the Rio Olympics in August, is becoming more and more obvious. One of the famous BRIC countries and considered to be one of the global tigers just a few years ago, is today in deep recession.
It is interesting to note that Russia and Turkey are beginning to establish ties again; the big conflict of the recent past seems to be over. Politically this move could become pretty dangerous: Turkey is still a NATO member state and has quite an important role in the chaos around Syria. For the economy the situation might be far more positive in the short term because if Russia is opening up for travel and trade for Turkey again, it could be a quick boost for business in Turkey and also provide a way for many products to gain access to the Russian market once more in spite of sanctions.
If the oil price is any indicator of the general expectations of the global economy then some of the optimism has faded quite a bit in the last week. The steady level of around $50 per barrel has been abandoned and prices have come down a couple of dollars before bouncing up again at the end of last week. General worries can also be seen in the very stable trend of gold prices, which are also an indicator of crisis or inflation. Since inflation is presently not really a factor, it has to be because of a crisis that many want to invest in gold again.
Market Intelligence
Everybody in the northern hemisphere and the western world is beginning to wind down for the summer holidays. Although the holidays have shifted more and more into the month of August, this is only three weeks away and then most of the tanneries this part of the world will shut down their beamhouses and halt production.
Some will use the break for maintenance and renovation, others just for a holiday and some will use contract tanning facilities, because their business requires them to keep a supply of semi-finished materials coming; either that or they just don’t want to leave the raw material market so as not to lose out on the supply of specific raw hides.
In the past two weeks we have seen no major changes. Suppliers of raw material around the globe have decided that lowering raw material prices would not stimulate demand and consequently there is no reason to do it. Dominated by the large US suppliers, this kind of strategy has actually spilled into every other market too. Consequently prices are not changing, in spite of officially quoted prices.
What is really sold and how much of all raw material production globally is cleared remains questionable. We speak to too many people who are behind the scenes complaining about rising raw material stocks; nothing spectacular, but week by week input doesn’t equal output and stocks are rising. Most people like to be optimistic, because they have no interest in these raw material stocks losing value. Everybody who is a supplier knows that falling prices have far more negative implications than positive and everyone has a specific grade that is selling well and being absorbed by regular customers.
We have mentioned already in our general economic and political section that many people and investors are getting increasingly concerned about the outlook for the global economy again. Even if the political crisis in the Middle East is not making the headlines any more, there is barely a day without news of another terrorist attack somewhere around the globe. This is reducing travel and keeping people away from public places, which includes shopping centres too. Some may argue that this business is shifting to the internet, but generally the easy spending that people indulge in when they feel comfortable and safe is definitely missing.
One of the absolutely positive driving force in the general leather business has been the automotive industry. Indeed, the outlook for the rest of this year was rather positive. However, we are hearing more and more rumours about rising concerns in this industry too. Things are going badly in too many parts of the world. The crisis in Brazil has made car sales there slump and also the Brexit decision in the UK is beginning to concern some of the premium car manufacturers. The UK is the second-largest car market in Europe and the falling value of the pound and the uncertainty within the UK population will definitely have a negative impact on car sales or new lease contracts for high-value vehicles.
The ongoing public discussion about emissions and the aggressive intention of many governments to get away from petrol and diesel cars as quickly as possible is also beginning to make people worry. Justified or unjustified, no one likes to see the second-hand value of their car decline because of a political decision.
The situation in China is also getting no better. The south of the country has seen public demonstrations about the environment and in particular cases concerning the discharge of wastewater from tanneries have made some local governments decide to close a number of tanneries down. With very few exceptions, it is not really comfortable any more owning a tannery in China because nobody knows when public officials are going to walk in and close your business down. Demand for leather is far from being brilliant, which is creating cash flow problems.
Cash and finance for the majority of the leather industry in China are a serious headache at present. On the one hand nobody wants to lend money and on the other there are businesses with insufficient revenues. There are some big enterprises and a few other exceptions but if one looks at the total size of the Chinese leather industry it is definitely fair to say that there are more problems than smooth operations. Most suppliers are having to run after their customers to open letters of credit or to generate enough liquidity to ensure regular settlement of invoices or other obligations.
We are now well into July and whatever raw material is bought today will not arrive in China before September. It seems, however, the people are not bothered by this at all; they have time and inventories enough to wait until the trade gathers in Shanghai at the end of August for the All China Leather Exhibition. Business is never zero, but if there is any truth in our investigations it could become a pretty long and quiet summer in terms of sales into China.
We have taken the chance to discuss the situation with some people selling other raw materials to China. Everybody is reporting the same or a similar situation. Overcapacity in production, a tight cash-flow situation for most industries that are working in the raw materials sector, with the government not interested in any low-added-value or high-polluting industries; particularly not when we are talking about industries that seem to be reasonably small in relation to the entire economy and offer only limited numbers of jobs. Steelworks and power plants are in a much better position than cotton, wool, leather, paper and others.
So, everyone is now waiting to see leather orders for the second half of the year. Generally the economy looks vulnerable and, in particular, the situation in the auto industry will be of great importance.
The split market is not showing any kind of improvement. Many in the east are complaining about more rather than fewer problems in marketing their splits, especially at any kind of realistic price. Also here we have to wait and see what kind of leather orders are going to be placed in the coming months.
The skins market delivering no news. Nappa skins are still suffering a lot. The summer heat in China is preventing buyers from taking any skins at the moment. The effluent controls imposed by the government and the weak performance of the garment market adds to the problems. Owing to the low value of these skins many are not even safely preserved any more and go straight into landfill or rendering. On the other hand, lightweight, dense wool and large, high-quality skins still hold their value and still sell in regular quantities.
The coming weeks will be dominated by general activities to close factories down for the summer break. Demand for raw material will most likely decline further and we would not be surprised if prices see a set-back between now and the ACLE exhibition in Shanghai. Sellers will try to hold prices as steady as they can over the summer, but anyone who needs to sell will most likely need to make price concessions.
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