The Leather Pipeline - 19.09.17
19/09/2017
News from economics and finance was pretty slow over the past few weeks. Those who are interested in inflation received the latest data from various countries, which showed moderate rises due to an increase in the cost of energy. The magic figure of 2% is getting closer, which suggests that the time for raising interest rates might not be too far away. Central banks do not seem to be very eager to raise interest rates, however.
Normal observers are increasingly getting the impression that the low interest rates are a protection shield for many national budgets rather than a justified need to boost the global economy. Neutral and objective observers continue to believe that the low interest rates should be considered an indirect tax that is helping finance ministers more than economies or the people.
The weather was the most interesting headline in the past fortnight, with the hurricane in the Caribbean and the earthquake in Mexico the most significant news. Another weapons test by the North Korean government also attracted lots of attention. The country’s leaders continue to tease and challenge other nations, in particular the US and Japan. China is also recognising the latent danger next door.
The hurricanes that hit the Caribbean and several parts of the US caused a lot of casualties and damage. It will be a big challenge for the people, but it will also provide a small boost for the US economy due to the repairs that are needed. Many houses will have to be rebuilt and much of what has been destroyed will need to be bought again.
Petrol prices continued their recovery; we have now moved well into the 50s for a barrel of oil. The rise of gold prices has come to a temporary halt and the US dollar is taking a break after the constant decline of recent months. Uncertainty over US policy and in international politics means pundits are reluctant to predict which direction currencies are likely to go in. The pound sterling is staying pretty strong against the US dollar and the euro despite a stalemate in the ‘Brexit’ negotiations.
Market intelligence
Most people have now returned from their trips to Shanghai or around Asia. We are not of the opinion that they bring home much news or any new information from their long and expensive trips. But, that is not the reason why we travel. We make the trips to learn, to understand and to see first-hand if the reports that we read or see are correct. It is still best to meet people face-to-face and to bring your own impressions home based on the experiences you have in the streets, in the factories or in hotels and airports. The business meetings you attend just add to the general picture one is able to obtain.
We would be surprised if anyone has returned with a totally different opinion. We are early in the season and the demand for leather for the coming season is not yet clear. The fundamentals have not changed; leather in shoe production is still in retreat, while upholstery is stable on a global scale. This also applies for automotive. Tanning capacity is dropping, principally for environmental reasons. The demand for leather is improving due to rising quality and brand image. The lower end, starting with working gloves, faces the biggest problems.
We are now entering the fair season. Shoes, accessories and upholstery will be showcased, which could give an indication as to whether there is any light at the end of the tunnel for leather as a material. We have learnt to be a bit careful, however, because there is no guarantee that what you see at fashion shows will arrive at department stores or online shops. We have to be a bit cautious about show reports and their final influence on mass consumption.
We find recent discussions from the automotive industry quite interesting; it will be important watch out for major changes in the interior of cars. Electric is the great hype of the industry at the moment. The diesel engine has already been condemned and many countries have also declared there will be an end to petrol engines on their roads. The timeframe for this is the next 10 to 20 years so it might not influence business very much before 2020.
Nevertheless, the media is creating lots of hype around electric cars, which has even pushed talk of autonomous vehicles into the background. We believe that the engine is not what is important for the leather industry, rather it is whether you drive the vehicle yourself or it is driven for you. The importance of comfort and cosiness in the passenger cell is increasing the more we move passively from A to B. If you don’t drive yourself anymore, you focus more on the comfort of the surroundings.
The biggest question is if this trend will reduce the number of privately-owned vehicles. If people no longer drive themselves, it could lead to a trend of them no longer wanting to own the vehicle. Renting of vehicles could become much more prevalent.
The opposite is also possible, however, as privacy and individuality are still important concerns. With the vehicle’s software in control, the engine, power, acceleration and speed become far less important. This could result in the importance of the design and functionality of the interior rising sharply. If the passenger cell becomes just a mobile living room, there are plenty of chances for the leather industry to become part of it.
If that became the case, it would mean that automotive leather production on an industrial scale will reduce; only the bread and butter cars for rental or commercial use would be equipped with the type of standard leathers we see today. At the same time, it would open up a lot of opportunities for creative and smaller units to meet the demands of the consumer. It may also see the technical specifications, which are currently decided by the car manufacturers, play a less important role. The customer would be able to equip their car with any kind of leather they want, which would open the door for local, specialised units.
This would also go hand in hand with the production of electric cars, which will use significantly fewer parts and components, making production and assembly more flexible. The speed of change we are seeing at the moment means it is unlikely we will have to wait much longer before we see which direction the automotive industry is going to take. We shouldn’t expect too many changes in the next two or three years, however.
General business in recent weeks continued to be subdued. The international beef industry is trying almost everything to stabilise the markets and to stop the weakening trend of prices. The same stories about abundant sales and decent order books continue to be told, but the daily reality of the markets does not send the same message.
We have been dealing for several months with a wide spread in prices for raw materials of different qualities and from different origins. Not much has changed and only a few markets have started to accept the truth, which has resulted in the first real and serious cracks in price structures.
As an example, we can mention Australia and the UK, where price adjustments have begun, moving towards the benchmark still set by the market in the US. It is not the same all over and the biggest need for price corrections is still for hides predominantly used in the shoe leather industry.
It is not just a question of price corrections being sufficient to match price targets for finished leather; there is also a question over whether the hides produced as a result of strong beef demand can all be bought and turned into leather. Whether we like it or not, a large range of hide types are not experiencing shipment levels that match the production coming from the slaughterhouses.
With the recent correction of prices for dairy cows, we tend to believe that the market for those cows with hides suitable for better quality and heavy substance upholstery leather could be ready for a consolidation. For lighter weight types, which generally suffer from lower selections, this might not be the case. This would lead to further segmentation of the market, as we have already seen for many other raw material types.
For example, top quality veal skins, high-end material suitable for special vegetable leathers, and the premium line of automotive leathers have developed their own prices levels. They are connected to a specific product range and do not come under any serious threat of raw material substitution.
Other, more replaceable raw material continues to suffer from the problem of supply exceeding demand, which was been the case for a long time. Producers being willing to stock surplus material, the shrinking of tanning capacity and currency variations have contributed to changes in value in several supply regions.
Raw material suppliers will be hoping for a seasonal rise in demand throughout the winter or a sudden return of leather in shoe production. Otherwise it could become another tricky season.
The split market continues to reflect the general hide market. Segments of specialties are doing quite well, but this doesn’t really help the mainstream output. The value of standard splits continues to fall. This applies not just to wet blue, but also to lime splits and the collagen and gelatine sector. It is too early to draw conclusions; final judgement might only be possible when production is back in full swing in October.
The skins business remains in the same pattern. Specialties for lightweight double face, good quality linings and decoration continue to be in reasonable demand. Tanners are busy and raw material demand and prices are stable. When the quality fails to meet the top end of expectations interest begins to fade quickly and prices start to suffer. Skins for ordinary nappa production are still not finding any interest.
There doesn’t seem to be any real chance of escaping the ‘Groundhog Day’ scenario in the next few weeks. The industry continues to discuss contracts and business for the winter half. Prices need to be fixed, volumes planned and production plans established; these decisions used to be taken in September, but this has shifted more and more to October in recent years. This means the real start of the new season and cycle has not begun before that.
The industry is not yet in the position to take final decisions and so we are unlikely to see any major changes in the general situation at the moment. We might need to be patient until mid-October before daring to decide on an opinion about trends for the winter half.
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