Macroeconomics

A lack of major economical activity has prevailed in recent weeks and we have had to deal with the limited statistical data offered during the period. The main point of discussion during the last two weeks was whether we are experiencing a period of lower inflation or whether we are heading into deflation, risking the consequences of a major global depression similar to that of the 1930s. Lacking any real comparable historical data there is little to base any judgement on.

Many economies around the globe are presently contracting and wholesale and retail prices are falling in many countries. We still see exceptions in some of the emerging markets, led by China which was still reporting 6.1% growth in the first quarter. This may be the lowest seen in the last 25 years or so, and many are saying that China needs at least 8% to protect it from economical and social problems, but at least its economy is still expanding. Considering that exports from China are really lagging because of the soft performance of its main export markets, one has to accept the fact that domestic business must still be strong and that Chinese consumers are not overly worried by the global crisis.

Most other countries are still delivering pretty depressing news with shrinking growth rates and falling retail and wholesale prices.

However, there was some better news. It is far too early to take it as proof of improvement, but it can at least be considered a sign that negative trends might be slowing down and may even be getting closer to the bottom. Some of the big American banks were reporting healthy profits for the first quarter, while the largest Swiss bank’s performance was again pretty weak and it has announced further job cuts of more than 8,000 in the near future.

The commodity market was also pretty quiet. Commodity prices remained fairly stable and, if gold is one of the risk indicators, it seems investors have lost some of their fear—at least for the time being. The bullion did not jump over the $1,000 mark; in fact it fell further back to below the $900 mark. Oil prices are still trading around the $50 per barrel level. Neither rising stock piles nor possible production cuts are getting the market moving.

Stock markets continued to perform better although many experts warned that this could just be a bear market rally and that the next correction is on the horizon once again. The currency markets were also pretty quiet. The US$ remains reasonably steady, just a fraction firmer against the euro. Risk aversion is still declining, making some of the carry trades seem more attractive again.

All in all, we are experiencing a typical springtime market with many enjoying the extended days of sunshine rather than starting to take risks again.

Market intelligence

Most people had already returned from their trips to Asia before the last fortnight began. The Easter break came just at the right time and many had a chance to take a rest and to think about the situation before leaving for Lineapelle. The timing of the fair in Bologna was pretty close to Easter and many people were complaining that they had to travel again. Some were unhappy that they could not take a proper holiday break.

Many tanners participated in Hong Kong as well as in Bologna so it was pretty exhausting. Many questioned whether it was worth seeing some of their customers again within a period of just two weeks. However, as usual, everyone complains when the show starts, but when it draws to a close people say it was worthwhile.

This is not really surprising. The two shows are completely different and target a completely different customer base. While the event in Hong Kong is more a casual meeting place, the show in Italy is much more fashion and product oriented and is perhaps less international but definitely more focused on trendsetting. This was the case again this year. There has been no real trigger to improve business, but it was nice to see how, even in a period of crisis, tanners in Europe, and especially in Italy, are fighting hard to find new ways of offering their customer base something attractive to buy.

Highs and lows

We were massively impressed by the beautiful leathers that were on display. Many very, very nice covers were seen and it is always impressive to see how much leather qualities can still be improved. It was pretty clear which parts of the leather business are still performing much better than the rest of the market. Most tanners are focusing on bag leathers, while shoes were far less prominent. There is no need to mention upholstery and automotive anymore.

Another specialty segment of the Italian tanning industry was also really depressing. Vegetable leather, particularly sole leather, continues to be in a situation where fashion and general business are running fully against it. The general dress shoe with a high-quality vegetable leather sole is not performing well, which is not really surprising considering that the main consumer base is not performing very well. Bankers and general management, who still stick to formal dress codes, are the ones that have been worst hit by the general economical crisis. Consequently, these consumers are not as strong as they used to be. The more casual style shoe has been affected far less by the general economic climate.

Leather shoes make a comeback

It was also interesting that shoe manufacturers in Asia and the Middle East both confirmed that their export businesses are down by approximately 20%. However, a large portion of this downturn is compensated by increasing domestic consumption. This applies not only to China, but also for the main consumer markets in the Middle East. This is not only the result of increasing consumption, but is also by a sign that leather shoes are returning within these markets. When prices for raw materials were pretty high about a year ago, we saw a massive trend in using more plastic shoes. This applied mainly for women’s shoes and there are still a lot of plastic shoes on the shelves in these countries.

Many manufacturers confirmed that this trend has reversed and, even though leather shoes are approximately 20-30% more expensive, consumers are more willing to spend $20 for a pair for leather shoes than $10 for a plastic pair, also taking into considering the climate conditions in these areas.

Change needed

Coming back to the show in Bologna, a lot of negative reports about the event have circulated. Fewer exhibitors and not enough visitors were the dominating issues in most of the reports. This has been a constant complaint in recent years as the number of exhibitors is declining, and maybe the number of visitors is as well. However, it is quality that matters. It is worrying that exhibitors have to be present for the whole event and that visitors are increasingly coming just for the middle days and rushing through their schedules in order to save on travel costs.

As far as Lineapelle is concerned, organisers have been trying to do something about this for some time and they have tried to restrict visitors to buyers and designers only and to keep suppliers and servicing companies out as much as possible. We don't think that this is a particularly good idea. Better solutions need to be found.

We can easily understand that exhibitors are not happy to spend three or four days on the stands only to realise that for one day they are unable to handle the number of visitors, while on other days they are not seeing enough people to justify a full day’s presence. This is not only a problem for the fair in Bologna; it affects almost all the shows taking place at the moment. Perhaps it would be better if fixed visiting schedules were issued in order to stretch business and to offer everyone enough time to discuss matters that need to be discussed.

To draw the bottom line, we think the fair delivered mixed results. For some, business was quite active and stands were full. This mainly applies to the bag leather business. Some of the fashion-oriented shoe tanners were also quite satisfied and there were no complaints about the order situation. Tanners are happy that raw material prices were quite low and the only concern is that prices could start to rise again before the orders are all booked and delivered. If there is any problem, it is that buyers’ attitudes no longer offer long-term seasonal programmes, which would allow tanners to make the necessary preparations for raw material, chemical and labour planning. Most orders today are short-term and come with a very short lead time.

Better balance

Consequently, raw material sellers who disposed of light and better quality material were quite happy with their performance. This is actually nothing new because this has been the situation for six months or so. However, some months ago, people were still pretty uncertain about the future and decent stocks were still burdening the suppliers. The situation has now changed and the balance between supply and demand in this little part of the total supply chain has been reached in the meantime. We even heard that some categories were able to achieve moderate price advances.

We are seeing a similar situation for lightweight male bovine hides. Tanners in Europe and in the Orient are making sure that they get enough hides under their belts to be protected against possible surprises in the raw material market. In particular, better quality European bulls in the medium lower end are able to find enough buyers for the time being to clean up the productions.

The struggle continues

With the devastating situation in the upholstery and sole leather market, dairy cows are still almost completely depending on business from the Orient. While Chinese tanners, in particular, were pretty busy in this segment in the first quarter and were easing a bit of the pressure on the market, the situation has become pretty worrying again as the Italy fair confirmed that there is little hope for any kind of recovery of the business in Italy.

Upholstery tanners are heading into the low season of the year and sole leather tanners in Tuscany were so depressed about their business that it seems there will not be any improvement before the third quarter of 2009. That leaves dairy cows almost entirely in the hands of Asian buyers and it remains to be seen whether they will be active enough to clean up the stocks and the production in the months to come. Sellers are pointing to the reduced kill because cows are returning to the fields now. However, something that should not be forgotten is the very low price for milk at the moment, which could force many farmers to reduce their herd again. This could bring more hides onto the market than many people are expecting.

In our last issue we were rather prudent about the business and market activity in the raw material sector. Looking at the export sales numbers in the US we might have been too cautious, but speaking to European suppliers the situation has not been particularly brilliant in the past weeks. Keeping productions moving at a steady and consistent pace continues to be a struggle. There is no real confidence about the market situation so far.

Mixed messages

The splits market showed a little bit of activity. However, this only relates to some market segments. There were more suede articles in Italy and this is helping some of the splits productions that are suitable for this kind of material. The reduced offer of splits is also slowly making an impact. Despite the existence of decent inventories it seems that the drama might start to ease a bit.

The skins market is still pretty difficult. For the majority, the market is still very, very difficult. We are now waiting for the double face season but reports, particularly from Turkey, are still quite negative. The nappa business for garments can be described as nonexistent. Chinese tanners are also reporting that nappa garment leather is a very difficult business as a result of poor demand from Russia. They are also complaining about insufficient prices and demand for pulled wool. Prices for nappa and small skins remain under pressure.

In the coming weeks, activity will mainly depend on the performance of the Asian markets. With the strong sales in the past four to six weeks, one should assume that tanners are reasonably covered and we still think that a number of them has already increased inventory. Demand for better quality hides should remain decent. Why should a tannery buy anything other than better hides considering how small the difference between the different quality levels is? We don’t expect more than speculative purchasing for the economical hides. Prices might move fractionally upwards for better quality materials, but for the rest of the market we remain sceptical and would not be surprised if sales continued to be difficult throughout the spring and summer.

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