The Leather Pipeline - 13.12.16
13/12/2016
We still remember the time during the summer when the political and financial world had very little to offer in terms of information and entertainment. Well, one can’t complain now. Since the beginning of November politics and economics have delivered enough every week to make people wonder what kind of influence it is going to have on their business or on life in general.
Same in the past two weeks and it is actually pretty difficult to pick the most important and interesting ones from the basket.
At least for the Europeans the referendum in Italy was extremely important and the general community was expecting major turbulences no matter what the outcome was. Quite reverse: the decision for ‘no’ made Mr Renzi resign and leave the country without a government, once more. If statistics are right Italy has had 60 different governments in the past 70 years. At the time of writing it is still looking for a new government to get to the next elections. At the same time everybody was expecting great turbulence in the financial markets and to see the EU community losing possibly one more of their members. Surprise, surprise, very little happened in the end: the stock markets did not crash and the euro gained in value.
In Asia we saw an impeachment in South Korea, but what would have been considered as a serious and important political crisis in the past, sending shockwaves through the financial markets, is today at best causing some shrugged shoulders.
On the financial markets the community was then expecting a new decision from the European Central Bank on interest rates in Europe. It turned a few screws here and there, but in the end the low interest rates remain and more liquidity is being pumped into the markets no matter what. With quite positive reports from the US labour market in the expectation that the new administration there is going to invest significant amounts of money in infrastructure, markets continue their expectation that interest rates in the US will rise now, sooner rather than later.
Purchasing manager indices in China (Caixin) were also quite positive and this made people optimistic about the Chinese economy and consumer spending. With the importance the Chinese economy has now reached, this is particularly good news (if the expectations are fulfilled in the end). When we look at commodities, the outlook for rising infrastructure investments is reflected in sharply rising prices for copper, for example. The oil price was able to hold its gains after the decision of OPEC to cut production and the barrel prices remain above the $50 mark. Many pundits are not convinced the gains in oil prices can be sustained because they still see over-production and abundant supply in the market.
Stock markets maintain their positive performance despite all the political headwinds and a number of people and investors still believe that they have a good chance of an end-of-year rally.
Market Intelligence
The leather pipeline over the past two weeks has been unable to decide which direction in terms of prices it is going to take. The biggest problem remains that we don’t have a dynamic and flexible marketplace for raw material any more and so we cannot expect any major short-term price variations.
We are presently in the most active production season for leather of the entire year. The winter time is the busiest production period for upholstery leathers, and if cars are selling then automotive factories will be taking only a short break for the Christmas holidays. The shoe industry is also consuming more leather and seeing higher production than at other times during the year. So, it’s no surprise that a lot of tanneries and finished product manufacturers around the globe are pretty busy. We are, without question, going through the best time of the year. Traditionally this continues as well into the months of January, February and March.
The present situation could however just camouflage the fundamental and structural problems of the industry.
In our last issue we already dealt with certain regional problems that the industry has at the moment and we may return to the situation in Italy, which is slowly beginning to make a deep impression on the market situation across Europe. One cannot see it in the price lists and it is not being discussed in public. However, the tanning restrictions in northern Italy are now beginning to slow down the product flow of quite a number of articles. It had become common practice for a good proportion of European hide production to need on a constant and regular basis fresh, chilled material for the drums in northern Italy; barely anyone imagined that this could end one day. The clients the beef industry and the processors had on their list were all top names, successful and rock-solid companies with a constant demand for raw material and so the programmes were just renewed month by month, apart, perhaps from the summer break in August.
When there was a surplus of dairy cows in the market or the prices in Asia were so much better, people redirected some product into salting as far as their capacities would allow. The good news is that the demand for upholstery-related material in China in the past two months has been pretty good so that the excess material that could no longer be delivered to the large tanners in northern Italy were finding an alternative home (and even at better prices despite the cost of salting and shipping). That eased the pain for several weeks in the period of the highest kill of the year.
It is a different story now for the heavy male hides, which for years have been absorbed by automotive tanners. Production and demand for high-quality leather in the automotive industry was constantly rising and what began with south German bulls only grew as further suitable raw material from all over Europe found a home as well. Here too it was just a question of the monthly renewal of supply contracts and there was almost never anyone having to beg for a delivery slot with these customers. Quite the reverse: other competing sectors like shoe and vegetable tanning faced serious difficulties when slaughter was low or any other issue reduced the supply base. They couldn’t afford the same prices as the automotive industry and so they couldn’t be sure of their raw material supply.
Beginning in early November the situation became increasingly difficult. Slaughter and weights for bulls and oxen in Europe went up and, at the same time, tanning capacity became restricted. In the beginning several new slots were found and supply was redirected into idle capacities in Italy or other countries. However, as time went on the situation became more difficult because supply was rising faster than new capacity to process the material could be found. For a few weeks now several regular and large buyers have had to tell their suppliers that they are pulling out of volume contracts because they don’t know where to tan them. Of course nobody wants to lose supply and so there are plenty of promises that this is only a temporary situation and everything will be fine again. But when?
It seems also that the supply industry hasn’t really taken the situation seriously enough. We have the limitations in the tanning capacity in Italy, but we have also a different situation in terms of production and sales within the automotive brands in Europe. The automotive business is good, but just not good for everyone, or at the same level. Some brands have taken advantage of the Christmas period to reduce production to bring their output and sales back into balance.
Consequently consumption in the automotive leather field in Europe is presently below the average levels and the planned and standard raw material supply for this time of the year. Hides are congesting; there is abundant material available. The main problem is that the situation cannot be handled by price. Cheaper hides would not create more demand or tanning capacity, which is the opposite of what we say when the raw material market is hot and we say that more money will not buy more hides.
What to do? There’s not much interest from anyone at the moment in a price crash, which is probably what would have happened in the past. The beef industry is trying to camouflage the problem by not changing its asking prices, traders of wet blue and wet white material don’t want to see their stocks losing value and even tanners would not be happy to see raw material prices plunge because they would pay in the long run with significantly lower leather prices for their premium product. General opinion at the moment is time will sort it out: when all the problems in Italy are solved and the big kill is behind us, everything will go back to normal and what is held up today will be sold and produced tomorrow.
It’s certainly possible, but when? Speaking to pundits in Italy they are not too optimistic that the problems with the effluent treatment difficulties in the north will be resolved soon. One cannot go against legislation and it seems likely that a renovation of the facilities, with larger investment, will be the only solution. Those who are close to the situation say discussions about what has to be done, who is going to pay for it and when one can start with the project have hardly started.
Demand for automotive leather will not be influenced by the situation and what cannot be produced in the usual places will have to be moved somewhere else. Until the New Year it is pretty unlikely that any serious decision will be taken on this.
Other than the problems in the European automotive leather supply chain we can’t find anything extraordinary. In China the upholstery business seem to be decent and reasonably active because most shippers continue to report that sales of dairy cows continue to be possible although the volumes and the interest have been fading in the past weeks. However tanners have not pulled out and if they get a decent offer from reliable supply the hides are taken. Sellers, if their timing is right, have been in a position to gain a little from the currency markets; the euro lost 2% of its value during the last week.
Nobody is reporting any rise in leather prices. Quite reverse low selections and corrected leathers continue to face serious headwinds in the market. Considering that the Chinese New Year is close (January 28) one wouldn’t be surprised if purchasing activity dries up in the coming weeks. Certainly some bargain hunters are always around and maybe they will try to test the waters over Christmas or in the first week of 2017.
The shoe sector is now in the high season of production, but this cannot erase the fundamental problems leather is facing in the shoe industry. Visit the shops anywhere around the globe and have a look at the kinds of shoes on sale and the materials they are made from. Leather would have been hit even harder if general global consumption had not remained fundamentally positive. We can however see that growth in the shoe industry is not combined with leather as a material. If nothing very surprising happens, leather consumption the shoe industry will now perform well due to the season, but when the season is over we could see the same problems as we saw earlier this year.
The split market continues to be very, very tricky. The niches in the leather sector are still taking certain specialty products. However, gelatine and collagen products are suffering all over the globe. Prices are falling and this weighs on the calculations of tanners. In the first quarter of 2017 split demand should still receive some support from higher-end shoe production. After that we will see where things are heading.
There is not much news from the skins market. There are here and there rumours that a bit more interest is seen for fellmongering skins, in particular from China and the Middle East. What we hear is that prices are not a valuation, but at best a tip. Many suppliers are just desperate to move product and so we understand that some special deals have been concluded. One has to understand we are talking about prices delivered between $1 and $2 and this is not paying for the skin or even covering costs. At that level not many people will continue to invest in salting, selecting and storage. Specialty products for high-quality nappa or interior design are still performing significantly better and adequate prices for suitable raw material can be achieved.
The next two weeks should deliver little in the way of news. Europe has closed its doors and except for the renewal of contracts for January one cannot really expect any major activity on the market. Maybe politics and the financial markets will rattle the currency and commodity markets and so have an influence but from simple supply and demand, selling and buying, we cannot really expect anything.
Only speculation and the activity of people who believe that during a period of little activity they might be well advised to do what others don’t do could have an effect on the market situation. Generally we would say that raw material for the positively performing segments of the leather business will not see too much of a change. Low grades and extra-heavy males are in a totally unclear market environment at the moment and what solutions might be possible for this is perhaps the most interesting question of this Christmas season. We will stay on top of the issues and if anything special happens you will read it in our next publication.
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