The Leather Pipeline - 29.11.16
29/11/2016
The financial markets are not dominating the headlines at the moment. It is still politics that are holding the media’s and public’s attention.
The president-elect of the United States, Donald Trump, has begun to organise his new administration. A lot of new and unknown people will govern one of the biggest global powers and the world doesn’t really know what to expect.
However, the changes are not going just to take place across the Atlantic. Also in Europe we are expecting a number of elections in 2017 and for the moment the public poll about the Italian constitution is worrying many who are interested in politics. Whatever the decision, it could threaten stability within the Eurozone. As if that were not enough, the shaky Italian banking system has once again caught the attention of public investors. Many Italians have decided to buy gold and deposit it in Switzerland. Also France is expecting elections next May and with the recent strength of anti-EU campaigners all over Europe, in France too the outcome and the next political direction could become another serious challenge for the EU. A Frexit and Italexit are the next threats for the community.
From Turkey Mr Erdogan is sending messages that he could open the borders once again for refugees if the EU refuses to follow his ideas on international policy.
International stock markets are taking the present situation in different ways. While Wall Street considers the new president as potentially positive for the economy, European stock markets are not celebrating and are more focused on European problems and the European economy. The US stock markets have seen nice gains, while European stock markets are rather flat or even in retreat.
It’s interesting that even the Russian stock market has been gaining as a result of the election victory of Mr Trump.
Another quite important subject is the oil price, which at the moment is pretty much in a roller-coaster situation. Lack of clarity about US policy, as well as the policies of OPEC are leaving every interpretation and speculation open. The next big step for the direction in the energy market is going to be the next meeting of OPEC and whether decisions about production are taken.
Industrial metals are showing a very strong performance, to the surprise of many. On the basis of a continuing strong performance of the US economy and the announcement that Mr Trump is going to invest in infrastructure projects, plus a general positive outlook for the Chinese economy, have invited investors to take positions in tin, lead, copper and so on.
Also the currency markets continue to be interesting. The US dollar remains strong against most international currencies while at the same time the Euro is facing strong headwinds in view of the political situation in Europe.
Market Intelligence
We are quickly moving towards the end of the calendar year in the western world. It is just another three weeks to go until a short break is taken and 2016 comes to a close.
Normally this is a time when production is in regular flow; it is an active season in the leather pipeline. Not so much this year when we have quite a number of uncertainties and unclear situations in various parts of the international leather-producing clusters. It’s difficult to agree which one is the most important. Let’s work it in a geographical way, beginning in Europe.
In Europe the biggest problem continues to be wastewater treatment in the north of Italy. Many people thought that with the recent heavy rains the problem would fade, like it has done a number of times previously in this part of the world. Wastewater treatment plant problems have never been uncommon and generally they were related to a lack of water, which sometimes happens in this part of Europe. Quite the reverse this time: even heavy rain and abundant water supply have not eased the issue. We don’t want to enter into technical details, but generally an increase in the production of wet white is being blamed for legal limits being continuously broken.
We could have a long discussion about wastewater legislation in Europe, but the legal limits are certainly there to be respected. For the Italian industry, these are no different than for anybody else, but sometimes in the past we have had the impression that interpretations of the legislation in various parts of Europe are somewhat different. We all know that sometimes things move from one extreme to the other. For the time being the handling of the issue is very strict by the officials and that is costing the northern Italian tanning industry a lot of headaches and also money.
There are some major problems that are hitting the tanning industry in the region. On the one hand there are the reduced production volumes and the cost structure of the tanneries. Overheads remain mostly the same and various pundits who are close to the situation consider that tanneries with sufficient orders have lost approximately 10% of their production volume so far in 2016. Tanneries cannot easily plan their output because interruptions in production make it almost impossible to plan deliveries to many of their just-in-time partners. As a consequence, some of the big automotive customers are already asking for solutions or are relocating their orders.
The biggest problem however seems to be the situation that almost no solution is in sight. So far no real strategy has been developed between the tanning industry and the authorities on how to deal with the problem and what kind of investment or action can be taken to create a basis for safe production, respecting the legislation and the limits. Most likely one has to expect that some larger investments and restructuring of the effluent plants have to be made and this requires financial resources. All in all, it seems that the present situation is going to remain a difficult one and in particular at times of high production the limitations will continue to be pretty painful. So far many tanneries are trying to halt their beamhouse operations and to use contract tanning outside the area. However, as we all know this can never be a long-term solution for the problem.
Shifting the focus to India for a moment, the government decision there to abandon bank notes higher than 100 rupees is causing the entire country a big problem and many businesses are being badly hit, including the agricultural, tanning, shoe and accessories sectors. A lot of this business is still based on cash and in particular in the agricultural sector a lot of small farmers and wholesalers cannot handle the situation. For the factories, the absence of workers is the biggest problem because they are having to queue at the banks to change their cash and cannot come to work. Some people say that the entire pipeline is presently losing between 20% and 40% of production time, starting from slaughter and continuing down to tanning and manufacturing. Whether this is already hitting supply and shipments of existing orders is unclear. For the moment, however, it is not helping the leather industry in the country and it has definitely come at the wrong time because the exit of a lot of leather production and manufacturing from China means new opportunities, including for India.
The paradox is that the government decision has been in an effort to prevent corruption and tax evasion and the target was more the wealthy rather than ordinary workers. It might help the country in the long run, but for the moment it is definitely hitting poorer people in their daily lives.
From India we move to China, and it seems that here, too, strict environmental controls are back. There are already rumours that the province of Hebei is going to implement stricter controls on water and air pollution. Several people are saying that a lot of factories in the province will have to close down once again until the end of this year. It’s not totally unexpected following smog warnings in the bigger cities of China this winter.
As far as the capital, Beijing, is concerned, the leather industry is certainly not the biggest problem, but the authorities have to start somewhere, and it may as well be with the least problematic sectors for the economy. As usual, the information coming from China is strongly influenced by particular interests. As we have seen in the past, a lot of production quickly shifts to other provinces and in the end leather demand always remains the same; only the location is different.
We have to expect that Hebei province will remain the focus of government controls and tanners there will continue to have a rough time. Many people are predicting that only a few, strong operators will be allowed to continue while the rest will shift to other provinces, mainly Shandong. The government seems to want to continue a strategy of closing down the small and supporting the big. This is something the Chinese government indicated many years ago and if one can actually rely on one thing it is that the Chinese government will do what it says it will do.
In any case if it is true that finishing plants are to be closed for several weeks, it will take some time to reorganise production, so we have to expect a short-term downturn in production for the coming weeks. The worst could be that many of the smaller tanners lose business in the Chinese New Year shopping period. We are still at a very early stage and it may be our next issue before we have more information about this subject.
As one can see from the above the leather pipeline has once again to deal with several problems in several places around the globe. This will definitely not have any long-term effect on leather demand in general, but for the moment it means that there are a couple of issues making business more difficult during the busiest period of the year.
Coming to the general market situation, we have had to deal over the past two weeks with aggressive attempts from the beef industry to take benefit from the hot season of leather production. In many parts of the world there were reports of some kind of blackmailing. More and more processors and tanners are complaining about ‘take it or leave it’ discussions, which make serious dialogue about pricing and volume almost impossible. We have a lot of players in the market who, for various reasons, do not want to see raw material prices fall any further. The main reason is that they hold stocks that need to be protected.
We are still dealing with the major problem of imbalance. There is sufficient demand for higher-quality leather types. Certain production lines for premium segments are running smoothly and demand for leather in this sector remains reasonably stable. The problem continues to be the mass production segment and the indications that the period of continuous growth in the automotive sector is (at least) taking a temporary break.
Players have become extremely cautious about what they are saying, but reliable sources continue to talk about huge stocks of medium and lower grades all along the supply chain. This begins with raw materials and ends with finished leathers. A number of people are summarising it very simply by saying that it is not a question of price; it is simply that there is no demand for this material at the moment.
The split market is not taking off either; the situation hasn’t changed as far as we are concerned in the past two weeks. Certain quality segments in the split market are doing quite well and supply and demand seem to be in a decent balance. However this is not true for the majority; quite the reverse. In Europe prices for gelatine splits continue to fall and to remain under serious pressure. This is another negative impact on tanners’ revenues.
The skin market continues to suffer from the same problems. Business for goatskins may be a little better and interest for interior design projects and in lightweight double-face continues to be reasonably stable. However, once again this is not the situation of the majority of global production; for example, sheep and lambskin nappa leathers are still not being sold in sufficient volumes. It is highly frustrating that, even with the very cheap prices we have at the moment, there is very little indication that leather is making a return in fashion. We are losing month by month on the demand side while on the supply side more and more skins need to be destroyed or the cost of processing and transport is greater than any possible benefit.
The next two weeks will be the final ones before the western world takes an end-of-the-year break. It is not very easy to make any predictions. The biggest problem is still that there is a massive clash between the beef industry and the leather pipeline, with the raw material side setting an almost non-negotiable price.
The market is in balance when all the various grades and origins are absorbed by the industry and turned into consumer products that are bought by the end user. More and more products are now becoming stuck along the supply chain and there are only two solutions. Either the consumer returns, the global economy improves and leather comes back into fashion and we turn inventory back into cash, or we can expect failures when interest rates start going up again.
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