The Leather Pipeline - 28.06.16
28/06/2016
The all dominating issue in the past two weeks was a UK referendum about leaving or staying in the European Union (EU). Last Thursday was the day and what happened was something that nobody could imagine: a small majority voted to leave.
Stock markets crashed on Friday, sterling lost several percent of its value, and on it went all around the globe. Nobody had really been expecting this outcome and a lot of investors and the financial markets have been caught on the wrong foot, which they need to correct right away. The main question in the financial markets was, immediately, if this could be a new financial crisis, similar to what happened in 2008.
It is still far too early to decide on this but there are many differences between now and eight years ago and it seems pretty unlikely that we are going to see a similar collapse in 2016 again. However, everybody knows the financial markets are very sensitive and one can never predict what the decisions investors are going to take. The good news is that the situation of the banks all around the globe today is significantly stronger than it was when Lehman Bros tumbled.
However, it remains a very important and unpleasant situation. You will find barely any people in Europe who are totally happy with the EU in general; there is a refugee problem and, before that, economical policies to handle the debt crisis separated the community significantly. On top of that it is possibly fair to say that nobody can be happy that politicians are commanding far more of our attention than they should; in many cases they can never actually justify or explain the money they cost and the benefit and work they deliver in return.
On the other hand, a thing should not be destroyed if you don’t like a part of it. It would be better to change it. The EU is now losing one strong component but Europe has to be united for the sake of peace and the counterweight in politics and economy. For the majority of the countries there is no serious alternative. And so it might prove to be in the end for the UK. They are going to feel it, and the day is now coming when they will have to handle everything themselves again, and with every single country trade regulations and political strategies have to be discussed individually at official levels. For business this is simply bad.
The only hope one could have these days is that there might be a chance of a second referendum. In the democratic world it’s not really a solution to go on voting until you like the result, but maybe in this important case some kind of a backdoor solution would be for the best. It’s frustrating that many of the EU politicians are asking immediately for the departure letter instead of giving it a bit of time to let the UK digest it all and decide if this is what they really want. The reaction in Brussels reminds one a little bit of the little children who feel insulted that they did not receive the attention they were expecting. The local politicians in the individual countries seem to be a bit more sensible and have not been that direct in their reactions.
Let’s see what the coming weeks are going to deliver; we might still see quite a few thunderstorms passing over Europe in this summer.
Market Intelligence
We have been expecting a major junction in the market for the past two weeks. However, it is pretty obvious that we have been wrong because nothing has changed in the market.
A number of people have begun to analyse the first six months of this year and it is clear that the peak period of Chinese domination in leather production has been fading since 2015. Raw material export statistics and production data show that Chinese leather production is shrinking; this is party because of a fall in demand but also because some production has moved to other countries. The main countries to benefit are those where the automotive industry is presently investing in production expansion, namely Mexico and parts of south-east Asia. The Middle East may also be mentioned, although this is not yet fully visible because, at the beginning of the automotive leather production cycle, crust is normally shipped to be finished and cut locally and this does not really give full information about the real geographical consumption of leather. But you can be sure this is something that is going to change.
In the shoe business we have a similar situation: here it is definitely about relocation. Price is still the chief commander in the shoe industry and with production in China going down and the general cost of production rising, China as a manufacturing hub for shoe manufacture is becoming less and less attractive. Of course size still matters and there are a number of other reasons why the production units in China are not closing down more quickly, but in general we have to be aware that Chinese leather shoe production is going to shrink further unless local consumption can compensate for the decline. This is obviously what the Chinese government is trying to develop, but for the time being without too much success.
If you speak to raw material suppliers, everyone has the same story to tell about shrinking business with China and new doors opening elsewhere. The two never work at the same speed, at least not in a market that is shrinking rather than expanding. With the rise of the industry in China we had a massive increase in consumption and old doors were closing much more slowly than the new ones were opening. Today the situation is different and there is no new big cluster of leather production opening up for new business.
It is not yet totally clear how all this is going to pan out after the summer break. Perhaps shoe leather demand will recover and new places for manufacturing it will be found. What is very important is that we explain to the consumer that leather is one of the most sustainable materials and definitely better than any plastic.
The rest of the markets such as upholstery and leathergoods are preparing for the traditional seasonal summer break and it is not very likely that we will experience any kind of major impulses from these sectors.
The split market continues to be as quiet as it was previously and gelatine-related splits are beginning to drop slightly in price. General business in splits is related to the shoe business and apart from some big players who are buying larger quantities of material that is extremely attractive price-wise we don’t see much going on in this sector.
The skins market has not seen very much activity and also here the approach of the summer break is evident. Although many manufacturers recognise that supply is beginning to dry up for many items and several of the better-quality skins could even become scarce, it is not really triggering any major demand so far. Asian buyers are scared about the temperatures and so they are not very keen on taking inventory when they don’t know if the skins can survive transportation and the heat before they reach the drums. The wool market is also pretty stagnant at the moment and consequently there is little interest from fellmongers.
For the coming two weeks we can’t really see where the big trigger and interest could come from. With a round of business that has taken place in June it might well be possible that most of the tanneries have already bought what they think they will need for the summer period and for the restart after the summer break. Certainly this could apply to Asian buyers because what they buy now is not going to arrive at their factories before the end of August. In Europe we might see another round of purchasing, but this is most likely for arrival after the summer holidays and from now on, week after week, more people are going to close down. Apart from a decline in business, we have an issue with wastewater treatment in Italy, which is reducing soaking capacity in the northern part of the country by 50%. Sellers will not immediately surrender, but a stalemate over the next fortnight would surprise no-one.
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