The Leather Pipeline - 23.08.16
23/08/2016
We are still in the peak holiday period and until September one cannot really expect any major activity in the financial markets.
With the lack of investors around stock markets are quiet. Maybe this is for the best when everybody is on holiday and taking a break from the stress.
Development at political levels might presently be more important than anything else. The conflict in Syria and the developments in Turkey are presently a proxy to the big conflicts that are developing around the globe. This is what is happening closer to Europe, while we see in Asia less violent, but still real confrontations between China and Japan in the ocean. In one area it is territory and strategy, in others it is religion and strategy. For the innocent people and children it makes no difference at all.
Normal people out in the street in the Western world find it mostly impossible to think about military conflicts after a long period of peace, but many of them have learned recently that violence and danger are getting closer in view of the terrorist attacks.
Oil prices, which had been seen at levels of $30 not long ago and at $40 at the beginning of this month have in the meantime climbed back to $50. Still not really expensive, but the trend of cheaper energy prices has been broken and this will also be reflected in consumer price index statistics unless it is just a temporary and short-term recovery due to speculation. Fundamentally little has changed. ‘Experts’ are constantly asking if production cuts are on their way or if the general surplus of oil, discussed just a few month ago, is still valid and will lead to prices falling back soon.
Market optimists are still talking of a rebound in oil demand and claim that in their opinion oil demand and consumption is still outpacing supply, while the pessimist see more supply and stable demand at best due to the rising production of renewable energy and a flat global economy. We think it is all speculation and since the prices have lost their downward momentum after the sharp fall it was time to buy oil as an investment, also in view of the limited investment alternatives at the moment and the constant tensions in the Middle East.
Despite the rising oil price, investors are convinced that the Federal Reserve will not raise interest rates soon, making the US dollar less attractive as an investment currency. Consequently the dollar has fallen against the euro, although it is still within the range of $1.10-$1.15. Sterling is still suffering from the Brexit decision and has made the UK an interesting and cheap travel destination over the summer.
Market Intelligence
Slowly the leather pipeline is beginning to flow again. So far it is more about preparation than activity, but almost everyone is now preparing for a full reopening.
During next week many factories will start production again and the last ones will start the week after. Many of the commercial staff will pack their bags for the trip to China and to visit the All China Leather Exhibition in Shanghai and in a few weeks everyone will return to the normal daily routine.
The question is what this routine is going to look like? How full are the order books? What are the prices for leather and what indications have tanners had from retailers and brands? Many players expect too much from the immediate time after the holiday break. This applies in particular to the raw material suppliers who go through a quiet time during the summer with many of their customers on holiday and market activity slowing so that a serious review and analysis of demand and prices can barely be made.
Tanners and factories resume with the standard orders and deliveries they already had in place before the holidays and this is what they start with after the break. Usually it takes several weeks before any serious and valuable discussions can be finalised for the winter production season.
Consequently, the market is presently managing the existing rather than anything new. The fairs over the coming four weeks will be used by many to collect as much information as possible and the first encounters with people are mainly used to check how people feel about business rather than to see what kind of business is around. This is also related to the fact that retail in summer is also not really active.
There are still sectors that enjoy stable conditions and there are others that are seeing a falling consumption of leather. There is excessive production capacity, mainly in China where the industry is suffering in particular from stricter environmental controls, a stronger currency and rising production costs. All of this has made leather less attractive as a material. The aggregated effect of rising production costs in combination with the domination of mass production has left the deepest footprints in the markets and industry clusters in China.
Seasons are changing. Fashion can be changed. The commercial and marketing departments begin with their budget plans for the next financial year. This is usually the time in which substantial and fundamental changes can be made, with the only exception being the automotive industry, which runs different and longer cycles.
Automotive continues to remain strong with a positive take-off into the new season. In Germany we might expect some interruptions in Volkswagen production because of a dispute between one of the suppliers of the group and the company, which has led to supply interruptions of components, including seat covers. The two opponents are fighting hard, but shorter working and interruption to the production of various models have already been announced. Legal action has already been taken to force the supplier to continue shipments. It is unlikely that these issues will interrupt production for long, because one way or another the issues will be resolved. However, for the short term and in particular considering that we are in the reopening phase after the summer break, it could mean a break in production for the supply chain, including the supply of leather and seat covers.
In the rest of the car industry most brands remain pretty positive about their business. SUVs, which are still the types of vehicle with one of the strongest growth forecasts, are normally furnished with leather to a larger extent and are enjoying reasonably high consumption levels. This, in combination with steady productions forecasts, means that leather demand in this field continues to be stable and at high levels. In the medium term however, the leather sector in automotive has to be watched. It is no secret that in China a lot of new factories are beginning production in the next 12 months with a market that is presently rather stagnant or to be more precise, the growth of sales is not the same as the increase in production capacity; the Chinese government has expressed concern about this.
In addition we see also a trend in which the volume of leather per car is falling. Manufacturers are substituting more interior parts and panels with non-leather materials and this may, contrary to all predictions, possibly slow the growth of leather consumption in this sector. This is why predictions of continuing large growth should be monitored regularly.
In the shoe sector we are desperately waiting for the plans for the production of shoes for the next season. We don’t expect global shoe consumption to decline, but we have to watch carefully to see if the trend to use less leather will also continue in the coming seasons. We would also love to see more active marketing of leather as a sustainable material in production. This is of course in direct conflict with the interest of the footwear industry, which prefers more shoes to be sold instead of seeing the same shoes being used for a longer period of time. With consumer attitudes and the production and marketing strategies of the large brands and retailers as they are, there is not much hope of this change becoming reality and it might need smaller niche brands to focus on this. The ‘big boys’ all seem to focus on quicker, more automated production, sales and if we are lucky on recycling programs. For the coming season it is unlikely that leather can benefit. The moderate rise in oil prices will not have any impact yet.
In the bag, upholstery and leathergoods sector we have our biggest hopes for a quick and positive turnaround. Luxury brands have problems in retail. Terrorism, a decline in tourism, and the switch to online sales are all challenges, but a fancy bag or a comfortable sofa of outstanding quality and image are still among the easiest ways for a broad customer base to have access to luxury items.
The number of potential buyers in the $500 to $10,000 range is still huge worldwide. If the marketing is right and the image of the brand stable and reliable there is a lot of market potential. Quality, story, usability and touch play a big role and all of it is extremely positive for leather.
If you don’t consider leather just as material but make it the backbone of your product story, a lot of attraction and value can be generated. People are still impressed by the unique story of raw materials such as wood, wool, cotton, silk and, of course, leather. This can make the final product unique and precious.
Not all brands do a good job. They love their brand more than the products they make. Brands can be very temporary if they are not based on a strong and valuable product. You can put a brand name on any product. It is the design and material that will make or break the product. Brands spend endless amounts in marketing to attract the attention of buyers. A bit more spent on materials, quality, story and design might be a better investment. The real market leaders in leather products demonstrate the success of such long-term investments in every quarterly result and in their stable and sustainable business concept.
With many raw materials for leather production being available at extremely low prices, with low or even negative interest rates, and with all the problems around the world generally making people willing to spend and to please themselves with something nice in the low or medium price ticket markets, we consider the time and the potential for a successful business in this field better than ever before.
We have already lost quite a bit of time, but the way should now be wide open for an ambitious and successful approach to the relaunch of leather as a precious material and not just an industrial component.
The split market remains quiet. On the one hand this is the result of the holidays, but in Asia it is also a consequence of the lack of orders for split leather. Also here we will have to see what the new season is going to offer for split leather products. Chinese tanners in particular are dramatically complaining about their limitations in sales and revenues for splits making their calculations for hides almost impossible. Although Europe is basically on holiday we understand that prices for lime splits are also falling and tanners are having to calculate with lower returns. The next two weeks will offer us more feedback about the future of the split market.
No news on skins. In many countries more and more low-value skins are being destroyed and it is a disaster that a valuable raw material cannot be used anymore. Specialties are still selling at steady levels, but again they only represent a minority of the production. Here too a turnaround is overdue. With garment, lining, women’s shoes, leathergoods and so on there is plenty of potential and price cannot be an excuse anymore for the low-level demand.
In the next week or so most will prepare for the All China Leather Exhibition in Shanghai. Exhibitor or visitor, everybody is hoping for clear indications and information about what to expect in the coming months. Raw material suppliers are trying to paint a rosy picture in their pre-fair reports. This is the usual story every year; it is an attempt to pave the way for price discussions. The Chinese leather industry is today still in a period of transition and this could mean that the fair in Shanghai might deliver surprises.
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