The Leather Pipeline - 21.02.17
21/02/2017
Politics remains the dominant factor on the financial markets. The news media must be extremely happy with the new administration in the US because there is now an endless stream of exciting daily news. Having a daily supply of news to report is good news for them.
However, looking at the content of the news, it is obvious that no matter who is right or wrong we are living in sensitive times. It is obvious to almost everyone that general stability around the globe is seriously threatened. Cyberwar, fake news, alternative facts, echo rooms, information bubbles, rumours and whispers make the headlines, with one group busy circulating the stories and another busy denying them. One thing is obvious: Europe has quite a number of elections this year and everyone is scared about cyber attacks, hacking and manipulation of public opinion using the new internet tools. Some more topics too. The US government is so busy handling its internal issues that it cannot devote as much attention as before to international affairs and the world has become more unstable, with polarisation all over. Writing the list of conflicts takes longer every day
The financial markets continue to treat it all pretty much as business as usual. This is quite understandable because there is very little investors can do about what is happening on the political stage. Stock markets continue to move sideways, currencies too and only gold has made strong advances since January with investors buying bullion in uncertain times to protect their wealth.
Decent economic data from the US and rising consumer prices triggered speculation that interest rates will go up there sooner rather than later and the most recent speeches of Federal Reserve chair, Janet Yellen have fuelled expectations, even though this is in direct conflict with the stated policy of the US president who wants to see a weaker dollar and more support for local industry.
In Europe the Greek debt crisis has come into focus again. Brexit is beginning to worry commentators too, in many ways. The main questions are over how Brexit can be handled legally and how long it will take to decouple the UK from the European Union.
In China the rate of credit expansion is beginning to be a worry again, as is the sharp rise in consumer prices. If products get much more expensive at the factory gate in China this will reach global consumers eventually. This might be good news for those who would love to see inflation rates rising again in the hope that this will bring an end to a low-interest policy that is causing many problems too. However, for the guy in the street higher prices are never good news.
The oil price remains in a very narrow trading band and prices remain in the first half of the fifties for the barrel.
Market Intelligence
These first weeks after the Chinese New Year have been pretty uneventful. Many, in particular sellers, had high expectations in regard to business and we dare to say that most of them will have been disappointed. As far as the raw material markets are concerned it seems that tanners have planned quite well and that is possibly also the reason why they took a proper holiday this year and were not available to deal with emails and phone calls during the break.
It is no real surprise because at this time of the year the serious leather business is all in the books and people are just producing against the orders they have received. Prices for finished leather are fixed, and without any major change in the retail markets or issues with logistics there is no real reason why anyone should move off track. It seems that there is a new way to deal with information and news. While in the past the news depended on what had happened, information has today become a tool for trying to make things happen.
No one can expect in February any particular news or changes to current production for the winter season. Something else that, in our opinion, has changed is the factor of speculation. The big industrial players just cover their regular needs and most of them are neatly tied up with the industrial suppliers of raw material. It has already been a trend for some time that traders and smaller units in the leather pipeline are becoming less and less important and in particular those who saw their survival strategy in speculating with raw material have had their fingers burned; they show no signs at the moment of being willing to try the same thing again.
In recent weeks a lot of company results have been published, confirming what we already knew. All the luxury brands reported rock solid growth in their sales for the year 2016, particularly in leathergoods. Automotive manufacturers, and in particular those in the premium segment, had one of the best years ever in 2016, and leather furniture in the high-end section also reported single-digit, and in some cases even double-digit, growth. There is no need to repeat that shoes, too, sold well last year, with the unfortunate detail that many of them were not made from leather.
All this is reflected along the leather pipeline and as far as the raw materials markets are concerned prices have been kept under control and volatility has substantially reduced. This is some of the best news we could have because it helps deliver the stability serious business people like to have.
As far as the raw material markets are concerned they are now shifting once again into the pre-fair mode. Suppliers know very well that we are in the final lap of the busy winter season and if they wish to secure the raw material prices for a longer period of time and to prepare their discussions with customers for the upcoming fairs in Milan (Lineapelle, February 21-23) and after that in Hong Kong (APLF, March 29-31), they have to set a firmer tone for the market. At this time of the year this is usually a bit easier because, traditionally, the raw material pipeline is reasonably well cleaned up and most suppliers claim to have low stocks and comfortable sold-forward positions.
This might be the case for some of the ‘hot items’, but it definitely does not apply to all types of raw material. As we have mentioned before, we have formed the impression from all our discussions with tanners and suppliers that both groups feel reasonably comfortable, but this will not be the case for long. Knowing that the general demand for raw material is going to decline in the second and third quarters of 2017, tanners can watch their inventory position with a bit more calm and don’t need to take action when people claim there might be supply shortages along the road.
Another issue is price. Once again we don’t need to discuss those leather articles that have a very good leverage between raw material price and finished product price. For the rest, the competition presented by artificial fibres remains extremely tough. The upholstery business, which has been a very strong driver in recent months, is hitting a price-ceiling and buyers are becoming more price-sensitive now that replenishment costs are 10% to 20% higher than the prices they paid at the beginning of the season. For the leather manufacturer, today’s raw material price levels and higher production costs mean that they need to achieve a very solid price increase for leather for the coming season.
Leather prices for the coming season, in particular for upholstery, remain totally unclear. New deals are going to be negotiated between summer and autumn 2017 but definitely not today. Tanners will just buy what they need to continue production, but everybody should be aware of the fact that the present prices for raw material and the prices that are still valid for finished leather do not match. This applies in particular to hides used in medium- and high-end furniture leather.
Tanners hoping for customers to visit them in Milan and bring a nice portfolio of leather orders with them may be disappointed. Buyers will mainly come to see what the research and development departments of their regular suppliers (or anybody else) have developed since September and if there is anything that appears so attractive that using it in production immediately cannot be avoided. At this stage we can’t see anything particularly new as far as fashion and leather products are concerned. The strong performer remains leather that presents its natural beauty; the Italian tanners continue to be famous in demonstrating this beauty every time and in new and fascinating ways. For the premium, most innovative, high quality and top fashion suppliers one has to be optimistic again.
For the remaining part of the leather pipeline we hope that the industry is going to focus and to present its strengths. Leather as a material is in competition with artificial materials that are so much easier for fashion and apparel retail companies to use. Artificial materials are available in abundant supply, can be changed quickly as far as colours and presentation is concerned and they are also much easier to manufacture. If the large retail chains today want to serve customers with cheap and fashionable products every six or eight weeks, leather has a difficult time. Retailers want to grow and so the same budget has to buy more consumer products.
If leather can’t beat the competition in time and price it has to focus on its outstanding positive arguments: comfort, sustainability and environmental responsibility. Polyurethane in all its different variations continues to be a very problematic material. Every cleaning process is discharging microparticles into effluent. They don’t smell and you don’t see them, but they are there. Well managed tanneries meeting the present international standards are producing a material that lasts much longer and leaves a footprint that is, considering the entire lifecycle, far less problematic than all the mass production of artificial fibres. Leather can never meet all of the global material demand, but it should focus on what it has to offer and to find and to convince potential customers who might today not be fully aware of the situation. Many people simply don’t know.
We can still find nothing particularly new in the split market. Like everywhere else specialty products are doing pretty well, while the cheap, mass-market products continue to struggle. Cheap splits, which used to be consumed in large quantities in sectors such as working gloves for example, continue to struggle. Also in this sector the Lineapelle fair in Milan might offer all of us new options, new articles that will support the consumption of splits again.
As with splits, there is nothing new in the skins market. In many countries more and more skins are no longer being processed because the price does not cover the production cost. A lot of rendering operations are already complaining because wool is a serious headache for a rendering plant. Top quality and specialty items can find customers and tanners producing them have the advantage of relatively cheap raw material prices. However, for many standard items prices between $1 and $2 simply make no sense. Once again, this is a very clear indicator that price is not the only issue today. It is the material that has been taken off the agenda of consumer product manufacturing. If it were just about price, product manufacturers would be using this material.
The trade and the leather pipeline will now travel to Milan for Lineapelle and many will hope for good news. We are sure they will be disappointed, however, there is no reason to be too negative. Leather continues to perform in high-end, specialty, prestigious and image-rich products, and there is always a very good chance that it will also see a recovery in the commodity sector. The industry remains in defensive mode; it should stop excusing and start convincing. We have the tools to reach the public without multi-million PR campaigns; others are already doing it successfully.
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