The Leather Pipeline - 6.3.18
06/03/2018
The situation in politics and the financial markets has calmed down a little, although the general subjects remain the same. The markets slowly draw their attentions to the elections in Italy and to the new chairman of the US Federal Reserve, Jerome Powell, and his views on the economy and prices.
In his first testimony to the US Congress last week, Mr Powell confirmed his positive view of the economy; this triggered fresh speculation about interest rate hikes. It led to a slight recovery of the US dollar and a minor weakness in the stock markets, but nothing outstanding. Expect a sharp rise in volatility and an increase in short-term movements. Despite a weaker trend, the general sidestepping tactic remains intact. Investors are getting more nervous.
In China, President Xi Jinping aims to cement his position by removing restrictions on presidential terms. It seems final acceptance by the country’s congress is just a formality. In the US, President Donald Trump announced plans to impose tariffs on steel and on aluminium. Independent of the effect on the economy, this is once again bad news for free trade. On the same day, Russia’s President, Vladimir Putin, gave a speech to the nation in which he praised a new set of high-tech arms, which included nuclear ones. The trend of global relations is really not healthy.
While Europe delivered fairly strong data about the labour market, the news from China about industrial output was disappointing. However, given the timing of the Chinese New Year holidays, this kind of data can be misleading.
The rising spread between interest rates in the US and in other parts of the world should be boosting the US dollar more than it actually is. The dollar is still reasonably weak despite a short recovery to levels of around $1.22 against the Euro. It has failed to consistently break the $1.25 mark.
The big figures of $1.23 and $1.22 seemed to be strongly defended, which underlines the statements of several traders that the dollar is currently a political one and that the US administration, with the support of the Federal Reserve, continue to favour a weaker dollar.
One has to assume that the markets on their own would have already reacted more to the spreads. At the moment, a lot points towards further weakness in the US dollar if the markets continue to follow US and global politics rather than the economic fundamentals.
The oil price has drifted a little lower in sympathy with the US dollar exchange rate. The barrel is back closer to $60, rather than around the $70 level. We mentioned a while ago that the supply and demand balance hasn’t changed much, which makes the rise in oil prices difficult to explain.
The trading range of precious metals has been quite narrow since the beginning of the year, which is showing that the markets are not yet ready for the next big move.
Market Intelligence
The main focus of the past two weeks was on the Lineapelle Fair in Milan and on the return of the Asian industry after the Chinese New Year holidays. We wish our readers in that part of the world a very Happy Year of the Dog!
Plenty has already been written about Lineapelle. Many people we spoke to at the fair and afterwards felt like they had had showered under the fountain of youth. There is another world away from PETA, anti-beef campaigners and those still trying to convince the world that the tanning industry is polluting the entire planet and threatening the survival of mankind.
There are people still willing to accept that hides and skins are an unavoidable by-product of the meat many humans still like to consume. They realise that it can be turned into a material that is not just sustainable, long-lasting and functional, but can also be beautiful and offer aesthetic and sensory appeal.
Lessons from Lineapelle
Before we get too excited, let’s get back to basics. The show in Milan was well-attended and many also stressed the quality of visitors in attendance. Since Lineapelle is a fashion and trend show, the exhibiting (Italian) tanning industry tries to limit access as much as possible to designers, manufacturers and clients. In the end, all the interested people found their way into the show, including the most ‘disliked’ raw material suppliers.
A strong driver of attendance was the Tanning Tech machinery fair, which took place in parallel with Lineapelle. This meant a lot of tanning technicians and people responsible for production also attended. All in all, it was a vibrant event despite the reduced attendance from Asia, where the New Year holidays kept a number of people at home with their families.
As far as the stands occupied by the quality tanners were concerned, all of them were active. Staff were busy on the first two days of the show, although, as usual, activity declined on the third day. This gave those who stayed for the full three days some time to walk around the aisles, meet colleagues and take a moment to spy on what their competition had brought to the show.
In the closed shop of leather enthusiasts, there was a generally positive mood. For the exclusive club of specialty and fashion producers the only concern was about the issues related to leather production and the material’s image. Few were unhappy about their 2017 results or about the outlook for 2018, at least as far as they can judge in February.
The only unhappy faces were those of the players in standard productions and articles. This is nothing new; the only difference is that what had been denied for a long time has now become the facts. Prices for cows and for lower qualities and weights dropped quickly, as did the quotes for low selections, including for wet blue.
What was frightening and surprising was the volume of unsold low selections which are reportedly waiting for buyers in warehouses in Italy. To the neutral observer, it seems that many hides that failed to find a buyer in Europe during the high season of slaughter have been turned into wet blue in the hope they will find buyers after the New Year when the kill usually drops.
The kill dropped, but the buyers did not arrive and the owners didn’t have the courage or optimism to hide the hides any longer or to wait for more demand at the APLF exhibition in Hong Kong. This led to a standstill for many items.
The situation was different for the better or heavier materials, but buyers were still insisting on price concessions. These had to be granted, but were only in a narrow range so the price spread between materials of different qualities continues to widen.
Overall, the show in Milan confirmed what we already knew and resulted in a slight shift in raw material prices. The real question is why has it taken so long for the players to realise this was necessary?
We took home that there is still a great passion for leather, but it remains a great challenge to attract general consumer markets to real leather. As one person mentioned about the garment sector: if just 20% of the women who have bought ‘imitation’ leather leggings, trousers or jackets could have been convinced to choose the genuine material, the sheep and lamb skin sectors would no longer need to dump skins. This statement could be easily transferred into other sectors of leather production.
Industry-wide campaign
The past two weeks were reasonably quiet in the leather pipeline. The Chinese New Year holidays left gaps in the market activity as players in Asia have learned to take a real holiday. Tanners and other leather people showed no desire to carry out any business communications, aside from exchanging good wishes with their friends abroad.
This meant activity was quite slow in the major leather producing countries and reduced the opportunities for sellers to make sales. For the medium and lower end of the quality range, this was yet more bad news. Another period of reduced interest and activity means that unsold inventory continued to increase. Speaking to several contacts in the south and centre of the US, the concern is rising. There is concern that revenues are approaching critical levels where it starts to be unprofitable to handle the material.
Chinese tanners seemed to quickly realise the situation. After a flurry of emails, they quickly disappeared, realising that sellers were desperate and that there was little chance that the market would see a sharp turnaround before the APLF exhibition in Hong Kong. They decided it would be best to wait for the suppliers visiting ahead of the show or to meet the people at the show.
These are all just the general games of the market. The simple and fundamental question is if leather demand can absorb the supply of raw materials. After more than a year of this and that discussion, we need to face the realities. For the vast majority of raw materials there is not enough demand and it is pointless to try to camouflage this with incorrect information about supply and production. It might ease the speed of the decline, but it will not change the facts.
We need a trigger to make leather as a material more interesting and to break the trend of less leather being used wherever possible. What is it that makes leather different? It is not the surface of even the touch and feel anymore; this can be copied quite successfully. It is the function and durability of leather, as well as its sustainability.
Leather has never successfully reached the consumer and made them choose it as a material. Instead, it has had to wait patiently and accept the decisions of brands and retailers. It is obvious what the industry has to do; it must work on the consumer and work on the manufacturer, rather than trying to win the battle against the cheaper copy.
We are aware of all the meetings and discussions which are taking place at the moment in associations, federations and organisations, but we have not seen a common strategy for 50 years. There are hundreds of individual marketing campaigns, statements, meetings and ideas, but the convincing and easy to understand statement which convinces the consumer is still missing.
There are good intentions here and there, but we have not yet found a slogan or statement which unites the whole global industry from slaughterhouse to tannery, and which is used by everyone: big to small, sheepskin to cattle hide, goat to deer, kangaroo to pig, smallest factory in Africa to mega tannery in China, industrial to artisan leather making, lining to garment. The focus of a large part of the industry on their own interests might have a short-term effect, but it will not impact the industry in general.
Splits and skins
The split market continues to struggle in the same way as the hide market. Some industrial productions and the niches are unable to absorb the entire production. China’s decision to class low value splits as waste and to not allow them into the country is not making things any easier. Discussions with makers of cheap working gloves have made it clear that this large consumer market has also shifted to artificial materials.
There are a few positives in the skins markets. The bulk consumption of nappa leather by the garment sector is not improving, but many others slowly are. Goat skins for shoes, glove leather, decoration, double face for garments and linings have made a decent recovery, with the exception of low quality items. Overall, we see the skins market as more lively than any other.
All eyes on Hong Kong
Our next publication will come after the APLF exhibition in Hong Kong. One has to assume that business will be quiet this week, apart from the private deals made by suppliers during trips to Asia ahead of the show. We are under the impression that sellers would need to offer substantial discounts if they are looking for sales prior to the show. Tanners do not seem desperate to replenish their raw material inventories and will only do so at lower prices.
Political matters are not helping the situation at the moment and the leather pipeline is one of the global businesses that could be hit hardest. The fair in Hong Kong will offer the opportunity to speak to players from across the world and the information collected will certainly offer a clearer picture of what we can expect for this spring and summer.
Share this story:
