The Leather Pipeline - 09.08.16
09/08/2016
It is the time of the year when it makes sense in one sense to write publications like ours because people have extra time to read them, but on the other hand it makes less sense because very little is happening. This makes life difficult for everyone trying to fill pages.
Fortunately the Olympics have started and so a good part of the news and headlines are already filled. The rest has to be served by the elections in the US and the regular source of news that is Turkey with president Erdogan. The situation in that part of the world and the political game being played now by Turkey, as an important ally and political companion for East and West at the same time, could still be a very important factor in international politics.
Discussions about Turkey’s position in NATO, its interest in becoming a member of the European Union, its position in the conflict in Syria and the strategic importance of the Bosphorus for Russia will be important subjects for the next US president to deal with.
Without the US and the new president no real progress in any discussion can be made so other players are taking the time to meet and discuss their ideas and to test the water for the time to come.
In terms of economics and data not much is happening. From China one gets a bit of everything. On one side the government is pretending that growth is on track on the other side overseas trade remains pretty weak. The US economy remains reasonably flat but the labour market has delivered better data than expected. Consequently the markets were once again willing to discuss a possible interest-rate hike by the Federal Reserve before the end of the year.
The US dollar, which had been losing shine with fading hopes for higher interests, turned around a little on this news, but it is still trading in a very narrow range between $1.10 and $1.15 to the euro, as it has been for a pretty long time now.
Oil remains a bit of an investment toy for traders. The barrel fell back for a day before speculators returned to the market and pushed prices higher again and so we ended the period at levels in the mid-$40s.
We see a similar situation for many other commodities. In particular industrial and precious metals are already the darlings of investors and have been for the whole year. Missing yielding investments and seeing stocks and real estate at pretty high levels have made metals a favourite investment for the big money. Also in expectation of more rumbles around the world a bit of real value might not be a bad idea. Unfortunately hides and skins do not belong to this class of investment, but Hermès and Gucci bags may do instead.
Market Intelligence
The month of August has become more and more a period in which everything comes to a standstill. There is the Christmas week in Europe and the Lunar New Year holidays in China, but these interruptions are shorter and more regional.
Over the years the global supply chain seems to have decided that August is the time to take a break and even in regions where it is not the peak holiday period, the effects are felt almost to the same extent.
In Europe almost all tanneries are closed and so are the remaining manufacturers of premium shoes, bags and also cars, reopening is the last week of August or even the first week of September.
The general market situation, which has been so complicated already for a long time, has made it difficult for a while to trace anything really new or valuable in front of or behind the curtains. All the fundamentals have been mentioned and analysed and the status quo has been in place now for quite a long time. Wherever leather is a fixed part of a high-quality, long-life product it has lost nothing of its reputation and lost nothing in terms of consumer appreciation. Not even the vegan trend, which has reached high-net-worth women, has triggered any major decline in the demand for luxury bags, premium cars or designer sofas.
The wealthy around the world have enough money to spend it on a regular basis and the over-40s who put quality and durability above fashion, still fancy leather and its quality. They are willing to spend on high-quality products that they like, that offer good value for money and last for more than one fashion season. Strong brands that maintain strong links between their products and leather continue to have the material on their purchasing and priority list. So far so good, but this is only serving and allowing part of the raw material to be used up. For those who produce or sell this kind of product, the story ends here. They are not touched or influenced by what is coming now.
For the rest of the products that can be made from leather the situation remains difficult, whether leather aficionados and the beef industry like it or not. The industry has always had a saying that there will never be a hide or skin wasted, dumped or buried. While we still see prices for many cattle hides in the comfort zone, we have been dealing for a long time with the situation that price isn’t the issue any more for skins. A lot of goatskins and lambskins in all kinds of preservation status have no market today. The skins are in stock all over, prices far below processing cost are being offered and still there are not enough takers to clean them up, although everybody knows they can barely go any cheaper. The problem is that over the past two years a lot of speculative money has been used to buy skins that looked so attractive in price at the time that buyers could not resist.
Some have just bought them for trading and got stuck with them, others have processed them and sold the wool and got stuck with the pickle or wet blue and also quite a number are sitting on stocks in crust or finished leather having found that there is simply no market for the product. It is not the price that is the problem, but the demand for leather as a material. It is no longer the case that leather is needed to serve the global consumer; it’s easy to see that. There are enough alternatives at very reasonable prices to avoid leather. As long as cotton and oil – just to name the main competitors in price – remain within their current price ranges, any improvement in the situation would seem unlikely. The price for lamb and sheep leather cannot get any cheaper, because it is already being sold at levels that are no reflection of the real cost of manufacturing.
So, it is not price that is the key factor. It might play a role, but if one looks seriously at the difference in material prices it cannot be the decisive parameter. Speaking to several mass manufacturers and retailers, both groups are quoting easier and cheaper manufacturing, easier quality controls, quicker and faster adjustments or changes in production and lower rejection rates as factors that make leather alternatives much more attractive. This applies even to materials like lining. Have a look at the shops still selling for the summer season and check how many shoes either have no lining or just a layer of the cheapest fabric. This applies not only to shoes in the lower price sections, but also represents normality far into the medium price range. If you are lucky, you may at least still find leather uppers.
It is not our intention to be negative and to scare. However, if we take the situation in sheepskin nappa leather today compared to what we had two years ago, many people are saying it cannot get worse, but this was the case last year too and things did get worse. Those who do not believe in the theory of less leather consumption and the consequent erosion of tanning capacities are the ones sitting on skins they thought could not get any cheaper.
We see a similar situation in the bovine section. A good proportion of the hides produced around the globe are still selling. Why wouldn’t they? As we have seen, there is still a decent and stable demand for certain types of leather from certain types of consumers and manufacturers. However, is there enough demand beyond that? When we look at the price of US steers, EU bull hides and several others, there should be room for selling hides that do not quite meet the same standards of quality and volume. So suppliers are confident about selling this material and just keep the hides if their price targets are not met. There is always somebody looking for a little material and this makes them confident. In the end it is the same argument. How many hides would we clean up if prices were 20% or 30% or 40 % lower? Exactly the number that could be turned and sold as leather now, plus whatever number buyers would take on spec, like many ovine buyers did at the beginning of this cycle.
To draw a bottom line under the last paragraphs, we are having to deal with a sizeable surplus of medium- and lower-quality hides and also splits in the market; these need to be cleared eventually. Low interest rates and a clear opinion that lowering asking prices will not stimulate demand anyway make sales volumes too small to clean up what is available in the market place at the moment.
We are in August and if we are lucky everything could take a turn for the better in September and onwards when demand and production show their real levels for the coming season and the leather pipeline has to put its cards on the table in terms of demand and inventory.
Global business has been quite limited in the past weeks. There was a hiccup in US sales for a week, but in total average sales over several weeks have been nothing to be excited about. In addition one has also to raise questions about which types are sold. That there is stable demand for several types is beyond question, but what about the rest? Strong sales weeks only reflect large programme deals with the big global takers, fine, but what about the rest?
In Europe sales have been light and for months now we see some types moving without any restriction while others face strong headwinds and struggle to find any takers. The split market is as it has been for months: specialties yes, standards no. Also here there are still big stocks around that cannot find any stable demand. The wave of speculation we saw a while ago has disappeared too.
In skins the situation is the same. Specialties such as natural-colour decorative rugs, high-quality dense wool skins, high-end nappa, feather-light double-face material, all of this is finding a home at adequate prices. For the rest, though, it is a different story.
Hot summer weather is making potential buyers in the Middle East and China reluctant and only the easing pressure on the environmental side in Hebei and the reopening of factories in the province is developing some hope.
Three weeks from now the All China Leather Exhibition in Shanghai will open its doors. Although it is not a place for selling leather really, it is the big indicator after the long summer break of how sellers and buyers feel and what they have in mind. Just three weeks later we will all meet again in Milan for Lineapelle, where the real fashion and leather trends are displayed. If anyone can trigger new trends in leather and excite fashion houses and retailers then it is the Italian tanning industry. So, although it is unlikely that too much will happen immediately, six weeks from now we should have a clear idea of where the trends will lead us, what is needed and if leather in general can regain some market share in consumer products.
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