The Leather Pipeline - 10.01.17
10/01/2017
Macroeconomics
Since mid-December most of the world has been in holiday mode; unfortunately this does not mean that the world is calm and peaceful. Various terrorist attacks in Europe and the Middle East broke the peaceful time and reminded the world that we are all still dealing with the daily threat of a handful completely insane people. However, despite all the casualties, the world is not showing any weakness versus those who are trying to break civilisation and gain support for the insane ideas. In the meantime our thoughts are with all the victims and their families.
In the world of general economics and politics the situation was fortunately much more quiet. Many experts had expected volatile markets for the last two weeks of 2016, with possibly serious movements on the currency or the stock markets. Very little of this really happened and almost no market moved very much compared to the valuations and prices already established at the beginning of December.
Generally was 2016 a pretty positive year for commodities and some of them saw quite significant gains and here we might quote copper and oil to give as examples. Oil prices are beginning to push inflation up; the rates in Europe went up by 1.7% in December, pretty close to the target of 2% everybody is said to be happy with. Under the condition that oil prices stay at present levels, one has to expect consumer prices to rise even higher. What had been positive in pouring more money into the consumer’s pocket has now become negative; the general impact on consumer prices caused by rising transport and materials costs is still to come.
The political world is going to change into 2017. The US will have a new president and in Europe we have a number of important elections in various countries that will guide politics on this side of the Atlantic. Cyberwar is the major headline and this battlefield has become much more important than anything else. The new president elect in the United States could become a threat to free global trade. It will also be interesting to see if the new era of politics is based on just 140-character Twitter messages instead of meetings, long documents, negotiations and diplomatic affairs. The world might need some time to understand how politics are going to go.
Most general economic data around the globe shows positive expectations for businesses for this new year. All indices that measure business and consumer sentiment are pointing upwards and this might be the best news of the New Year. There is still time to wish all our regular readers a very happy, healthy and prosperous 2017, with a lucky hand for the business decisions that have to be taken.
Market Intelligence
The business along the leather pipeline in the last weeks of 2016 and in the first week of 2017 has been as quiet as expected. Despite the fact that the holidays left little room for extended holidays this year, one had the impression that offices and factories were open but that external activity was limited. Anyone we spoke to confirmed that email traffic, fax messages and phone conversations were as few as they would have been if the big holiday dates had fallen in the middle of the week.
This is no surprise really. In the West, most industrial production was closed, at least during Christmas week. In many Catholic regions, there was also a holiday (for the Epiphany) on the Friday of the first week of the year so that week was shortened too. In many places production restarted on the Monday of the second week, but all in a pretty slow and standard way, with most people still busy handling administrative matters and commercial activity was pretty slow.
The situation in Asia was a bit different. People there are beginning to wind down now and to clear their desks before the annual holiday for Chinese New Year. It falls this year at the end of January but one can hear many contacts confirm that most businesses are already slowing down; some are even closing at the end of this week or by the middle of next week. This means that we are in the same situation as we were in Europe in the second half of November. Before people can leave for celebrations with their families they have to make plans for production and business before and after the Chinese New Year break. This includes material planning, which means not only purchasing but also shipment and logistics.
Many seem to be painting a pretty positive picture about the situation in the leather pipeline. It might be time once again, at the beginning of the year, to summarise where we stand in the leather pipeline. The global economy remains in an uncertain state. Many changes and political uncertainties make it difficult to formulate predictions about the trend of the global economy.
Oil prices have almost doubled since the beginning of 2016, which will change the balance of material costs. In casual and mass shoe production leather has lost a lot of ground and this trend is continuing. Prices, but also easier, cheaper and quicker production, are all leading brands and manufacturers towards alternative materials.
Luxury items that are tightly linked to leather as a unique and image-enhancing material continue to be in good demand. Automotive had a very strong year in 2016. However, the world of mobility is changing and nobody knows what this is going to mean for the consumption of leather. New urban lifestyles signal a possible move away from private ownership of cars, and different requirements in terms of interiors could change the conditions for leather in automotive by quite a bit. However for the year 2017 it is still far too early to say and it is more a question of how many cars people are able and willing to purchase after the strong performance we have seen in recent years.
Leather in upholstery is also enjoying a strong performance. The main driving force of this trend is China where a strong property market and consumer moves towards quality have created a very positive market environment for the high-end quality segment, although without helping leather in mass production.
We consider the above to be the main trends that were already established after the summer break last year and we cannot find any indication of change to this fundamental market situation for the rest of the season and, basically, for the first half of 2017.
Nobody has a real crystal ball or the ability to know where global society and the economy are going in 2017. If the new president of the United States is really going to be a problem for international free trade it would certainly mean a lot to the leather pipeline, which is traditionally based on networking around the globe. The main producers of raw material no longer have much manufacturing in their countries and this means raw material moves to the east, just as finished products come back the other way. Tariffs and taxes would make a lot of consumer products more expensive without even thinking about the question is what response the manufacturing countries might have. In today’s globalised world nobody really wants to think about new obstacles.
On the supply side we are also facing a period of uncertainty. Global wealth and rising demand for meat in Asia are counterbalanced with a rising trend against animal protein consumption in Europe. Large organisations are campaigning against industrial meat production and at least in Europe there has been a positive response among many consumers. In the rest of the world this trend has not yet found much support so one can assume that general protein consumption will at least be stable or possibly even increase. Consequently we will see the usual variations in the supply of raw material, but there is no reason at this stage to believe that we should expect a major decline in production or availability. We could see a shift in the availability of hides from specific origins or of specific quality; we might also expect heavy slaughter weights and lower numbers, but these are minor changes that, in the end, will not really change the general material flow in the course of the year.
Another trend that we are watching with great care is the structure of the leather production industry. Environmental issues, in particular in China, are becoming more important, and this is gaining momentum now. Although the leather industry might have very little responsibility for the smog in northern China it is pretty obvious that the Chinese government is now working hard on any kind of environmental problem and the leather industry remains in focus. The consequence is not a dying industry, but that it is bigger units that can afford to invest in the necessary environmental controls that will succeed. Just in the past weeks there were quite a few mentions of tanneries in the south of China being closed and ordered to make sure that they have their wastewater treatment and air pollution under control. This is going to change the market structure in the raw material and finished leather marketplace considerably.
Let’s have a quick look at what has really happened in the past weeks in the raw material markets. Actually, very little changed in terms of prices. We were able to trace only very little purchasing activity and most of it in direct relation to the Chinese upholstery leather markets. There is a strong demand for high-end quality leathers and in particular for good-grain, heavy-substance and natural-look articles. There is a certain limitation of raw materials that can provide these qualities and that means that most of the interest we are seeing is for premium and heavy dairy cows and heifers. That has made quite a few of exporters in Europe and in other parts of the world optimistic and, with a declining kill after this season, has given a few people the idea of a pretty positive start to the new year and a positive outlook for the first quarter.
There is no question that this demand exists, but it is too early to get overexcited. We are right at the beginning of the Chinese New Year holidays and, traditionally, tanners over-estimate the levels of demand that will follow this holiday. We saw a similar situation exactly a year ago and prices pushed higher with the consequence that after the APLF exhibition in Hong Kong and into the second and third quarter of the year all the interest faded and the seasonal hype was gone. With the missing demand for an adequate proportion of low-quality selections one should be very careful about the valuation of hides and avoid too much excitement as far as prices are concerned. There might be another pretty sobering time ahead, as in many years before.
It is true that oil prices have gone up and this should, at least in the medium term, create a kind of a safety-net for leather prices for corrected and cheaper types. However, at this stage the market demand has not yet really developed it still might take a few months before finished product brands are willing to increase the proportion of leather in their collections again.
We are not in a position to report anything new from the split market. Good quality suede splits continue to be in good demand and anyone looking in the shops, especially at women’s collections, will see many shoes and boots made from split suede. It has been a very cheap and attractive material, and what is in the shops now was produced six month ago when the prices were at their lowest. In the meantime they have recovered a little and with the uncertainty for the production for grain leather it is unclear how supply is going to develop in the months to come, but there is no reason not to be optimistic for this sector. For the rest of the split market the situation continues to be quite difficult. Gelatine and collagen are facing a lot of price headwinds from alternative materials and also PU-coated splits cannot really be called a hot item at this stage.
The skins market is showing a little bit of life too, fortunately. Many suppliers were still sitting on quite sizeable stocks but we now see a lot more interest from China, which is not unusual at this time of the year. It means that there is a general willingness to consider lamb and sheep nappa once again and maybe all the excess stock that built up in 2015 and at the beginning of 2016 might now be consumed. As far as Europe is concerned the Chinese prefer winter skins because they are bigger, come with more wool and have a much lower risk of damage during shipment. The Chinese New Year break may create a bit of an interruption. Fundamentally many skins are still at historical lows and they will not get any cheaper.
For the coming two weeks we still believe that not too many changes can be expected. Europe has to decide on its raw material purchases for February and the Chinese might have to take decisions about shipments for after their holiday. We are still in peak production season and the demand for raw material should remain stable, with a stable if not declining slaughter. So we can expect stability.
Share this story:
