The Leather Pipeline - 12.12.17
12/12/2017
The global economy has had a good ride in 2017 and most pundits are convinced that the year is ending better than it began. As far as economic data and statistics are concerned the numbers are more positive today than they were 12 month ago. Production, corporate earnings, interest rates, purchasing manager indices, GNPs, inflation rates, acceptable energy prices, labour markets, stock markets: there is very little that is not positive in the world of the economists. Yes, there are warning voices, but this kind of Cassandra will always be around, no matter how good or bad the situation is.
So far so good, but we have also learned in the past that if there is no cloud in the sky it doesn’t mean that there is not a serious thunderstorm waiting behind the horizon. Looking for any kind of the negative indicator, private, national and corporate debt in several countries could be one of them. Politicians and national bankers cannot be 100% convinced about the situation otherwise they would not continue to see the need for further stimulation of their economies.
The political situation is different. We are not going to mention once again all the various political issues the world has to deal with at the moment, but we think that most of our readers will agree that the political situation around the globe has certainly not improved in the year 2017. For the ordinary person in the street, having a secure job with a safe and, ideally, rising income, health and security are the issues that matter and affect the general feeling of comfort and confidence. Politics matter only when they begin to influence life directly and negatively. Ask the people in Yemen, Syria or North Korea just to mention a few examples. However, they are still in a very small minority these days.
This means that in many parts of the world politicians can continue to focus on their egos and to make their supporters believe that nationalism, confrontation and conflicts are the ways to solve problems and to protect citizens’ interests. History shows that this kind of playing with fire has frequently not ended well. There’s a lot of criticism about globalisation, but it has brought people closer to each other. It hasn’t been perfect, but options could be discussed in a mutual interest. If national or personal interests dominate, all this could be quickly terminated.
It seems that the financial markets are quite happy not to take any risk until the end of the year. Stock markets and currency markets continue in a pretty narrow range, but seem to be more sensitive to the situation in the Middle East. The oil price bounced a bit in view of recent OPEC decisions, but new high and low prices have not been established yet.
Perhaps only a real political surprise could push the financial markets out of the close ranges we have had for some time. However, it might be wise to be alert to changes. The bitcoin bonanza could be another indicator of unstable markets.
Market Intelligence
This issue is going to be one of the shorter reports. The leather pipeline is not producing any real news and is unlikely to until the New Year, when plans and budgets for 2018 will have to be reviewed and confirmed.
The leather pipeline - at least in the Western world – is beginning to wrap up and to prepare for the Christmas season. The main discussion at the moment is about how and when shipments can still be organised to arrive before the holidays. Some material is still needed. Another topic for discussion is for how long factories are going to be closed and when production will resume. With the holidays this year, factories could easily start work again on Tuesday, January 2. However, from what is known so far, a reasonable number of tanners have decided to stay closed for the first week of the New Year and will reopen on January 8.
In the case of China there are lots of rumours around. In the north of the country the closure for the Chinese New Year holidays (February 16) is actually of less importance, because due to the pollution controls many tanneries are not operating anyway. In a number of conversations that we have had with local pundits, we have been surprised by the information that even modern and newly built tanneries that are complying with the present regulations have had to cease production and local authorities cannot be convinced that they are not contributing to the pollution problem.
The tanning industry is obviously one of the victims when local governments have to report to the central government about their efforts to reduce pollution, and in particular air emissions. Since the main polluters and energy consumers in the region are energy and heavy industry, which are core industries and cannot be stopped, the smaller and less important ones have to take the blame, independent of their real impact on emissions. Not long ago, this large cut into tanning capacity would have created a shortage of available leather in the market, but now there is no outcry from anywhere in the world; the demand for leather can be met and no shoe, furniture or bag factories will have to stop production because they are missing a supply of leather.
Even if it is a bit boring, everything in the current analysis brings one back to the fundamental question of the balance between global supply of raw material and demand for finished leather. This is totally independent from the traditional short-term discussions. Generally the leather pipeline from the beginning has been of the opinion there will never be hides that remain unsold, and that every piece of raw material that is available is going to find a home and be made into leather. The only question was if you had been right or wrong on the price.
We continue to believe that this might change, or maybe has changed already. Price doesn’t seem to be a stimulus any more and even leather producers with a very stable business are limited in their interest to build inventory positions to cover demand for a longer period of time. If one just looks at the US export numbers one can see that there are leather producers in a position to secure their production for several months with a profit and will consequently be willing to come to an agreement with desperate suppliers, looking for safe outlets and some movement to stabilise raw material values. This may work in several pockets of the market, but does not balance the entire situation.
General estimations expect the global cattle kill to be at least steady in 2018 with the majority of analysts expecting numbers even to rise by up to 4%. This means we will have more raw material and with the general trend that heavier animals are being slaughtered we will also have more square-feet per unit. Although there is never any guarantee that such forecasts are going to be accurate the number of available cattle and the general trend in the global markets makes one believe that the supply side is quite safe. For a European it is sometimes a bit strange to see all these trends, because in daily life in Europe one has the impression that the end of beef consumption is pretty close. However in other parts of the world the situation is completely different with beef consumption still on the rise and showing no sign of slowing. When we take the case of China, many of our sources out there are reporting that the local kill is high this winter season and expected to stay like this into 2018.
With the supply side pretty stable we will all have to continue to watch the demand side for leather for the coming seasons. With the market trend as it is at the moment it is hard to believe that the players along the leather pipeline will be willing to raise their projections for leather demand and consequently to start to build inventory for the whole range of raw material. We need a real trigger to draw the consumer interest back to the natural and sustainable material that is leather to turn the general balance of supply and demand back. Otherwise we should be aware that the bovine hide market could see similar market conditions to those we have been seeing for a while already for lamb and sheepskin for nappa production.
There have been no changes in the split market. We hear that more and more tanners producing lime splits are checking how they can play a role in the supply chain of gelatin and collagen. However, this market is far from easy and in particular in the gelatin section we are facing a certain over-supply as well. There are a number of different options and the market is not growing at the speed many projected. As far as collagen is concerned it is a very technical issue, a pretty fragmented market too, capital- and tech-intensive. It is certainly not just a case of having to find a customer and move in. In leather production splits are still well received in specific niches, but this is not really worth reporting any more because we have had the same situation for almost a year.
The skins market continues to run with the same pattern. In Europe the season of lightweight, new-season double-face skins has come to an end and this means that lambskins are no longer delivering the quality specifications that tanners and consumers are interested in. This begins to weigh on prices once again and it is to be expected that we are going into another tough first half of the new year. In other parts of the world the situation is pretty much the same. Skins that either supply dense and fine wool for specific lining and garment production are doing well, while skins that can at least still deliver a good return for fine wool can also find a reasonable value due to the record prices and very strong demand for fine wool. All others are suffering.
For the remaining weeks of 2017 we wonder if anything change the general market pattern. Unless politics or surprising and sudden movements on the financial markets happen, we are not going to shake the raw material or consumer markets. The closer we more towards Christmas, the more the market activity will become dormant. The pipeline has to move and hides and skins have to be sold. there is still a lot of leather to be produced, delivered and manufactured if we just think about the automotive industry as an example. However, one hide or skin too many is depressing the mood. That’s what we are finding today.
However, as a bright spot, we know that the pipeline has always to be filled and looking at the purchasing pattern in particular from Asia we should still be optimistic for a flurry of replenishment between now and the first week of January. Chinese buyers are traditionally not the masters at managing falling markets and if one looks at the order books and shipments, you have to come to the conclusion that there is still quite a reasonable need to buy for the time of production in March and April.
So, we would say that we still have a fair chance of seeing rising activity at the end of the year. However, we think that the beef industry as well as hide suppliers should be careful with their traditional reflexes to challenge the market with higher prices. It might be better today to strengthen ties with good, regular customers to make sure that they don’t look for alternatives.
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