The Leather Pipeline - 13.06.17
13/06/2017
Who cares about the economy when violence, murder and terrorism cover the headlines?
Well, over the past two weeks we were not short of news. Once again terrorists murdered eight people in England, raising once again the question how to deal with the threat of terror and how to protect citizens. Terror has also reached Iran, where another attack took place.
Several Arab countries have implemented sanctions against Qatar and isolated the country from a great deal of foreign supplies. Without getting involved in the subject, it has become clear that many people had been aware of deep local tensions in the region. What is really worrying is that the conflict broke out after the visit of President Trump to the region. One has to be aware that the risk of an outbreak of the war has significantly increased; we can only hope that this is not going to happen.
In Europe, we saw the general election in the UK with a result that made the situation more complicated rather than easier. The country is now struggling to find a new government. Even worse, considering that the negotiations over Brexit are imminent, whatever the final outcome it looks like there is going to be a weak negotiator at the table.
At the time of writing the elections in France are still going on. President Macron is looking for a strong majority in parliament. Without a strong majority in parliament he will also struggle handle and rule the country the way he has promised and all the structural changes the economy might need might have to be put on hold once again. Next time we will know what the results are and if his position is supported or weakened.
The financial markets were pretty unimpressed by everything that has happened in the past two weeks. Stock markets, currency markets and commodities made no major moves. Commodities, including oil, were on the weak side, but with the conflict in the Middle East this could change pretty quickly. A lot of analysts are warning that stock markets are overvalued already. However the low interest policy in the US and Europe continues and there is no real indication that the national banks are willing to change in the short term. This means the markets continue to be flooded with money and this, traditionally, supports stock investments. Most organisations continue to be quite positive about global growth, but hardly any of them are really considering politics and regional tensions. It is definitely an acceptable strategy not to scare people, even more when there is very little you can change. So, the policy of business-as-usual and might be the best. People in the street all over the world have already enough to worry about.
Market Intelligence
With the beginning of June we are entering the holiday period in the northern hemisphere. Most of the holidays are taken in August, but already in May and June local holidays slow production down. Consumers are beginning to plan and think about their holidays and producers are having a look at their existing order books and thinking about what to do in terms of their production plans.
Business is not coming to a stop, but the focus of the leather pipeline is changing and the traditional heat of the high production season has usually gone by now. A handful of plants are taking their holidays in July, but in the recent years it has become common for almost all factories to close in the first three weeks of August, bringing business in the western world almost to a complete halt. For tanneries this means that most of the soaking and is already done some weeks before and the real restart is generally not on day one after the break; soakings are slowly increased during the first week after reopening.
As far as slaughter is concerned, we have the usual difference between beef consumption in Europe and the US. While in Europe beef is not the preferred barbecue product, we are dealing with the peak season in the US and the output of the slaughterhouses there is usually at the highest point of the year. This results in a weird situation because in Europe a lot of supply chains are undersupplied despite the falling production and the subdued interest from the tanneries. At the same, record-number weeks in the US seem to assure packers of regular sales and shipments of their main by-product.
The US beef industry is still the major benchmark for the global markets. There might be high production in Brazil too and also China and India are pretty large enough producers to play in the same league as the US, but all in all the US is the most professional and most intensively monitored supply base, reflecting the widest part from top to bottom of what the leather industry needs to produce for the leather pipeline.
One can certainly discuss how well US suppliers play their cards sometimes, but it is definitely true that they have done their job extremely well since the end of the first quarter. They had a bit of luck in the currency market, but in the end this part of the game always goes for or against you. They did not leave much business for any competing origin in the market segments they are in a position to cover. One has just to look at export sales and it is pretty obvious suppliers in Europe, Brazil or Australia have become the victims in terms of market share. This statement is of course only true if the assumption that leather demand in total is significantly less than in previous seasons.
There is one export market that is catching the eye of many players at the moment. The numbers that are reportedly being sold to Thailand are not the result of a remarkable rise in leather production and demand in that country. It is a new set-up of wet blue hides filling the pipeline and taking advantage of the significant rise in production costs in China, as well as the capacity reductions in China due to environmental restrictions. This is of course not the only argument behind the concept; flexibility and service have to be mentioned too.
Competent and professional players have established a strong foothold in the supply chain. The general conditions in the market are favourable if one looks just at production costs and the supply flexibility that can be offered. However, the risks have to be seen too: currency, selection, production and finance. For the time being the set-up can definitely become a threat for wet blue manufacturers and other origins trying to serve clients in Asia.
With regard to the general state of the leather pipeline, it seems that the most important question centres on how global leather demand is going to develop. We still meet quite a lot of people who deny that the demand for leather has been and is still in decline. They still see global demand as being strong enough to absorb the total output of hides and skins from the meat industry. Fluctuations in prices and temporary problems in selling raw material are only seen as the usual ups and downs of the market.
For our regular readers it cannot come as a surprise that we disagree. In particular, the shoe industry is a problem, but also bag leathers and upholstery from our point of view are suffering from declining demand for leather and not for the finished products themselves in the market. The main reason may not be that the consumer is turning against leather, but that the manufacturing industry wants to reduce its costs and speed up delivery times. This combination is, from our point of view, the main reason (apart from price) why manufacturing continues to turn against leather. It is also true that the use of leather as a material in the mass market is not producing the higher prices or better margins that would justify a return to leather again.
The decline in leather production and consumption can also be seen in the little effect there has been from quite a number of tanneries closing down or falling idle in the past 12 or 18 months. This is most obvious in China, but it is also happening in other countries such as India, Pakistan and Bangladesh. Apart from the increasing commercial difficulties, there are also environmental problems playing a role. We think it is fair to say that leather production is down and a great part of the overcapacity, created over many years, has either already vanished or will vanish pretty soon. As long as the world considers plastic waste to be less problematic than leather production it is difficult to see how this trend can be turned around.
One of the strong performers in the leather pipeline has been for many years the automotive industry. A massively expending market and the wish for individual mobility in emerging economies have supported a constant rise in vehicle production. It is true that the super-optimistic forecasts have never been met, but the number of cars produced globally and getting onto the road remains impressive. However, the discussion about the future of leather in cars is becoming more lively and dynamic. This may apply particularly at the moment in Europe where environmental discussions are playing such an enormous role in the market. The diesel scandal has triggered another and very strong discussion about mobility and in particular about individuals driving petrol and diesel cars. For diesel engines, which have been so popular due to their lower consumption, the pressure is growing. The discussion is a difficult subject and cannot be part of this publication, but for the moment it is weighing heavily on decisions in many countries on when to buy and what to buy when it comes to a new car.
In addition there is the problem of manufacturing, quality and price of leather also reached the medium price cars in many parts of the world. In addition one should not underestimate the anti-beef and anti-leather campaigns as a hidden danger for leather consumption in vehicles. It would be dangerous to close our eyes to the potential threat. The car industry doesn’t change in a day, a week or a month, but when decisions are taken they will have a strong and long-term influence. We think that even our biggest critics will agree that everything at the moment is on the move and has potential for change.
The split market remains in the same trouble it has been in for quite a long time already. Possibly, things are even deteriorating rather than getting better. The good news is that summer production of splits is retreating rather than increasing and so the output will be a bit less. We fail to see any positive momentum at the moment.
The skins market is delivering no major changes. Specialties do pretty well in the niches they have: interior design, rugs, top-quality nappa in the accessory segment, lightweight and top-quality double face have their markets and enjoy consistent and regular demand. Standard skins for standard garment production continue to struggle and price is not the factor. It is the material.
We don’t believe that we are going to see a lot of changes in the coming weeks. As far as bovine hides are concerned quite a bit of the immediate needs of the full-operating tanneries have already been covered and it seems unlikely that others will buy in anticipation, at least not at the higher prices that several players seem to expect after the good run the US suppliers have had over the past weeks. It is like in the oil market: restricting supply doesn’t really convert into seriously higher prices and a major drop can be prevented by the fundamental demand that is in the market all the time. However, we believe that in the early autumn we might see new directions that will come into play later this year.
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