The leather pipeline - 26.11.13
26/11/2013
The financial markets are not very exciting at the moment; we are in the middle of a cycle that is all is about tapering and interest rates. There is plenty of money around, may be even too much, but central bankers believe more money is the only medicine that can cure economies. It is a great help for national budget deficits and the big players on the financial markets: less interest to pay and more to play with. In later years we will be able to see whether it really was a good solution. For a successful cure you normally need less medicine as time progresses while from a drug you need a higher dose once you start to take it.
Most of the discussion in the markets was related to whether we are creating bubbles or not. The currency markets saw some fluctuations after comments by the European Central Bank were interpreted as interest rates could become negative in the eurozone. As a consequence, the euro lost a couple of percent of its value, but it quickly gained back most of its losses against the dollar.
There was positive news from the German economy and even better news from some of the troubled Mediterranean countries. Since any tapering in the United States seems to be some distance investors are still willing to sell the dollar and to buy into the euro. Political reforms in China and the negotiations for a free-trade zone between the EU and China also boosted European exporting countries.
The commodity markets remained in a pretty narrow trading range. Precious metals with the exception of platinum lost more of their shine, and one finds it hard to believe the oil market is reflecting the realities of physical supply and demand: prices are jumping in the range of about US dollars five per barrel. Oil supply continues to be good – investment guru Warren Buffer made a large investment into one of the biggest oil companies – and alternative energies continue to gain market share around the globe.
Market intelligence
The leather pipeline is beginning to prepare for the holiday season. We have two or three weeks to go until shipments to Asia and production in the Western world are interrupted.
Apart from that there is very little news. Suppliers and buyers are taking clear positions and with both sides being reasonably well-positioned nobody is willing to take any serious action. Sellers pretend to be in comfortable sold-forward positions and buyers seem to have bought enough to keep production running well into the New Year.
In principle we are facing a situation which is the same as last spring. Raw material prices had been pushed higher for the standard grades. Sellers were not responding with any consideration, but were rather putting prices up week by week to protect their positions and to underline their statement about cleared inventories and comparable forward positions until the end of the year. Tanners were answering by reducing purchases and only the few which missed the boat were willing to pay more to get the goods.
Talking to many of the larger players in Asia, one can feel how much uncertainty there is in leather production. On one side it is clear that for the commodity products, tanners failed to increase leather prices to the levels required to cover the raw material levels. On the other side there is the fear that raw material supply and production might not be enough to fill the drums.
The gets us back to the money side of the business. At a time where the majority of tanneries are not making money and an increasing number are cutting production, the others can be divided into two sections. The ones with limited financial resources are getting more cautious every day. Cash-flow is shrinking and every container bought is another new and high risk. As long as the market continues to rise it might turn out well when the goods arrive, but a slight correction in prices or in leather demand could break them. This applies mainly to smaller operations.
Others with strong financial resources see it differently. It may not be profitable to run a tannery at the moment, but there are other reasons to take a more strategic view. There is overcapacity. There is increasing protectionism, highlighted by the Colombian government’s recent decision to restrict raw material exports. Additionally we see shrinking beef production in some of the main supplying markets. These factors lead to too many soaking drums for too few hides and a classic ‘survival of the fittest’ situation. The easiest way is to control raw material and prices and if one finds partners on the supply side, even better. Some call it healthy consolidations, others an unhealthy concentration.
Whatever it is, it will change the business and we will see even fewer and bigger players. For the moment many tanners are trying to fight the trend, but there is not much hope the struggling ones have a fair chance. There is hardly any support from the suppliers or the customers.
One way or another the tanning capacity has to decline, because there are simply not enough hides (at the right price) for all the tanneries and a shrinking capacity is the only way to get either raw material prices down or leather prices up and to make the leather production a profitable operation again. At this stage everybody other than the tanner is reaping the benefits.
Another very important issue is whether leather can improve its reputation as a material. We have dealt with this subject many times, but if leather does not manage to make itself distinguishable from the look-alikes and cheaper alternatives the battle will not be won.
How hard this is can be seen with our colleagues in the wool business. They have had a global trademark for a while and it only now is it beginning to pay off. The consumer has been looking for cheaper alternatives for years, but slowly they and manufacturers are beginning to see the advantages, the added value and the potential of the ‘real thing’ rather than the cheaper copy. We will never attract the youth or the consumer who considers the life cycle of his shoes is not more than six months, or his furniture not more than two years and his leather interior in the car not longer than the leasing contract. However, there are many others who either have the money and desire something different or have the wish to own something that lasts and shows its beauty as it ages. This will not be achieved if leather is increasingly finished to make it look flawless and more like the artificial versions of leather.
This discussion is more than 20 years old, but it is more relevant than ever. We are sure that whoever has the courage to turn this into a smart marketing campaign will have success. It seems that the time has come for many reasons.
The split market indicates that the high point has been reached or is close. Some leather buyers still find it hard to get what they need. The price for wet blue splits can’t be justified in comparison with full hides. It would need the expected sharp gains in hide prices in the first quarter 2014 to support splits as a product in manufacturing.
In the present environment it is hard to justify why splits should be used in the same volume next season. In China an increasing number report that prices for drop splits are already coming down. In other parts of the world the prices for collagen splits have already begun to fall. This is unusual at this point of the season, but alternative collagen has become significantly cheaper and some players speak about stocks in several warehouses. The same applies to gelatine. The coming weeks will also see a slowdown for the season, but with the reopening of factories in 2014 we should see much more of the truth in this market.
The skin market is also over the top. Several of the strong performers like top quality double-face producers are speaking about strong resistance and several prices have already dropped by a few USD. The optimists are still pointing towards the supply, but it is season driven and the market isn’t finding the support it needs.
Negative news is coming from the nappa market. The commodity section is not doing too well and many speak about a decent amount of stock sitting firm in China. Although wool prices have been strong recently there was little support for the large fellmongers in China. Many are now hoping for a cold winter in Russia and some tailwind from the Chinese New Year shopping. However, time is running out and so one can only hope that the fashion designers who have shown plenty of leather this fall will have a stronger-than-usual impact on the orders of the department stores.
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